Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Vanguard Board Steered Passive Investing
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- Lucas: There's this assumption that every corporate board is ultimately accountable to someone outside the company. Shareholders, activists, maybe a founder with supervoting shares. And then there's Vanguard. Luna: Right, because Vanguard isn't owned by outside shareholders. It's owned by its own funds. Lucas: Exactly. The Vanguard Group is actually owned by the Vanguard mutual funds, and those funds are owned by their investors. So the board of directors at Vanguard answers to no outside entity. They answer to the fund shareholders—which, in practice, means millions of everyday people saving for retirement. Luna: That structure was John Bogle's idea. He wanted to eliminate the conflict where a fund company puts its own profits ahead of investors. Lucas: Bogle launched the first index fund for individual investors in 1976. It was mocked as 'Bogle's Folly.' But the board he built was designed to make sure the company never drifted from that low-cost mission. And that meant a board that actively resisted the normal incentives of Wall Street. Luna: So what did that board actually look like? No investment bankers, no celebrity directors? Lucas: Right. For decades, Vanguard's board consisted almost entirely of executives from within the firm, plus a few independent directors who were selected for their alignment with Bogle's philosophy—not for their Rolodex. No one from a bank, no one who might push for higher fees or complex products. The board's primary job was to keep costs low. Luna: And that sounds noble, but it also sounds insular. How do you avoid groupthink when everyone in the room already agrees? Lucas: That's the tension. And it came to a head in the early 1990s. Vanguard's flagship S&P 500 fund had grown huge—billions of dollars. Bogle believed the fund should close to new investors to protect performance. He argued that too much money chasing the same stocks would cause slippage. Luna: I remember reading about that. The board ultimately overruled him, right? Lucas: They did. And this is the key moment. The board—led by independent directors and some senior executives—decided that closing the fund would undermine Vanguard's core promise: that anyone could own the market at the lowest possible cost. They believed that scale, even if it created some tracking error, was better than exclusivity. Luna: So the board pushed for growth over purity. That's a fascinating choice from a board that was supposedly built to preserve Bogle's vision. Lucas: It's more interesting than that. Bogle himself later admitted the board was right. By staying open, Vanguard's fund became the vehicle that allowed millions of people to participate in the bull market of the 1990s and beyond. The board's decision effectively democratized indexing. Luna: But it also meant Vanguard became a behemoth. Today they manage over $9 trillion. Does a board designed for a scrappy upstart still work for a global giant? Lucas: That's the question. After Bogle stepped down as CEO in 1996, the board chose Jack Brennan as his successor. Brennan was an internal candidate, but he wasn't Bogle's clone. He pushed for more technology, more international expansion, more marketing. The board supported him, even when that meant drifting from Bogle's sometimes austere approach. Luna: And Bogle himself stayed on the board as chairman for a while. That must have created some interesting dynamics. Lucas: It did. There's a famous story where Bogle objected to Vanguard advertising on TV. He thought it was wasteful. The board debated it and ultimately approved a small campaign. Bogle lost that vote too. The board was willing to challenge the founder even while he was in the room. Luna: That kind of independence is rare. Most founder-led boards are rubber stamps. Lucas: But here's the catch: Vanguard's board doesn't face pressure from outside activists or hedge funds. So what happens when the board itself becomes complacent? In recent years, some critics have argued that Vanguard's board is too cozy with management, especially on issues like compensation and proxy voting. Luna: There was that controversy a few years ago about Vanguard's CEO pay package. The board approved a multi-million dollar compensation plan that seemed out of step with the low-cost ethos. Lucas: Right. In 2021, CEO Tim Buckley's total compensation was reported at over $15 million. That's modest by Wall Street standards, but for a company that preaches frugality, it raised eyebrows. The board defended it by saying they needed to retain top talent. But it shows that even a purpose-driven board can start to look like a conventional one. Luna: So maybe the structure isn't a permanent shield. The board is only as good as the people on it, and the culture they sustain. Lucas: Exactly. And that brings us to something even more consequential: how Vanguard's board handles its role as the largest shareholder in most public companies. Vanguard's stewardship team votes on thousands of proxy items each year. Those votes are essentially directed by the board's governance committee. Luna: So Vanguard's board isn't just governing Vanguard. It's influencing the governance of every company in the S&P 500. Lucas: That's the meta-layer. When Vanguard votes for or against a CEO pay plan or a board nominee at Apple or Exxon, that decision is shaped by policies set by Vanguard's own board. So the quality of Vanguard's governance has ripple effects across the entire economy. Luna: That's a lot of responsibility for a board that operates largely out of the public eye. Lucas: And it's a responsibility that's gotten harder. As index funds have grown, Vanguard, BlackRock, and State Street now collectively own about 25 percent of the average S&P 500 company. Regulators and politicians have started asking whether these asset managers have too much power. Luna: Has Vanguard's board engaged with that criticism? Lucas: Publicly, they've argued that their stewardship is a benefit—that they engage constructively with companies rather than just selling shares. But internally, the board has had to think hard about how to exercise influence without becoming a shadow regulator. Luna: If today's episode was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. We keep this show ad-free, and listener support is what makes that possible. Lucas: Yeah, it's a small thing that adds up. And it lets us keep digging into stories like this one. Anyway, back to Vanguard—because there's one more board moment I think is worth talking about. Luna: Which one? Lucas: The decision, in 2019, to lower the expense ratio on their target-date funds even further. The board could have kept fees where they were and pocketed more profit for the company. Instead, they cut costs, passing savings to investors. That's a concrete example of the board living out the mission. Luna: And it's a reminder that the board's structure—owned by the funds, not by outside shareholders—makes that kind of decision easier. There's no one demanding higher margins. Lucas: Right. The trade-off is that Vanguard's board doesn't have the market discipline that a public company board faces. No one can launch a proxy fight to replace them. So the discipline has to come from within—from the board's own commitment to the mission. Luna: And that's fragile. It depends on who's in the room. Lucas: It does. And as Vanguard's next generation of leaders takes over—Tim Buckley announced his retirement last year—the board will face its biggest test since the Bogle era: choosing a successor who can maintain that culture while navigating a world where passive investing is no longer the underdog. It's the dominant force. Luna: So the board's original insight—that structure shapes behavior—is still being tested. We'll see if it holds. Lucas: That's the story we'll be watching. For now, Vanguard's board remains a fascinating outlier: a board that answers to no one but its investors, and whose biggest challenge might be its own success.