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Vanguard asks passive investors to pay attention for proxy vote

BOSTON, Sept 19 (Reuters) - Vanguard Group needs its hands-off investor base to pay attention.

On Nov. 15 the world's largest mutual fund company will stage its broadest shareholder meeting in eight years and needs enough individual investors to vote on measures such as installing three new fund board members including Tim Buckley, who is set to take over as Vanguard chief executive in January.

Retail investors are typically hard to stir into action, and Vanguards challenge is tougher than ever, given it has attracted some $3 trillion in investor assets in the eight years since it last held a wide shareholder vote.

In total, Vanguard now runs $4.6 trillion for some 20 million individual investors.

The nominees and other administrative matters up for vote are likely to pass by wide margins, said Daniel Wiener, who runs a newsletter for Vanguard investors, as fund shareholders tend to vote with management. Some shares are also voted by sponsors of retirement plans.

The most difficult part will be getting a quorum of shares to pass the measures. The voting will include 195 funds and the Pennsylvania-based company needs investors representing a third of the value of each of those funds to cast ballots.

Retail investors tend to avoid voting in corporate elections and Vanguard is best known for its passive funds, where shareholders effectively "set it and forget it."

If Vanguard does not garner enough votes it likely would have to hold one or more follow-up events for funds that missed quorum, creating an administrative headache and extra expense.

To avoid that, Vanguard is leaving nothing to chance. The company is spending $17.6 million to drum up votes by mail, phone and electronically, according to its notice for the meeting.

Executives said they hope to capitalize on the fact that at least 95 percent of the company's clients now manage assets through computers and mobile devices.

"My hypothesis is that we have an engaged client base, but when our clients engage they are more likely to engage online," said Anne Robinson, Vanguard's general counsel, who is overseeing the process.

Her plan includes banner messages reminding shareholders to vote when they log on to their accounts. The company also has trained 4,500 of its staff to handle questions about the proxy from clients who call in.

About a third of funds have already reached quorum, Robinson said in a recent interview, and she aims for all of them to do so by the time of the meeting in Scottsdale, Arizona.

A TEST OF PRIORITIES

Vanguard could easily absorb the costs if it were to hold further meetings. The $600 billion Vanguard Total Stock Market Index Fund had total expenses of $271 million last year, for instance, according to a securities filing.

But Vanguard's campaign reflects how little attention investors typically pay to fund governance. In a typical corporate election only about 20 percent of retail investors will bother to vote, said Art Crozier of proxy solicitor Innisfree.

At other fund elections, postponements have been common. Fidelity Investments wound up adjourning and rescheduling a meeting of its Freedom target-date funds eight times from October through April for instance, according to the company.

When they do vote, fund shareholders typically back management. At Vanguard's last broad vote in 2009, all 10 fund board trustee candidates received at least 97 percent of shares voted, several fund filings funds show.

Vanguard held that meeting, and the current one, with an eye on requirements that trustees can fill board vacancies by appointment if at least two-thirds of trustees have been elected by shareholders. This time 12 fund trustee candidates are up for election, including the three new ones.

Since it had to stage the upcoming event, Robinson said, the company also will hold votes on five administrative proposals such as giving funds more leeway to hire and fire managers.

An additional proposal filed by activists calls on Vanguard to avoid shares in companies tied to genocide or human rights violations, reflecting how the infrequent meetings give internal critics a rare opportunity to speak up.

Stephen Davis, a senior fellow at Harvard Law School, said fund governance rules, dating from 1940, could use an update to give investors more regular input.

As things stand now, Vanguard's investors "are not acclimated to participating," he said. "There's no track record of them having to do that." (Reporting by Ross Kerber in Boston; Editing by Carmel Crimmins and Bill Rigby)