NEW VANGUARD GOVERNANCE RULES A MODEL FOR THE MUTUAL FUND

INDUSTRY AND INSTITUTIONAL MONEY OVERSIGHT?

Vanguard Funds founder John Boogle has been an advocate for mutual fund investment involvement in governance issues. Vanguard has issued the following guidelines on governance.

We think other mutual fund families will have to follow suit.

What do you think of these guidelines?

Please post your responses to lstybel@boardoptions.com

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The Vanguard funds exercise a voice on behalf of their shareholders in matters of corporate governance through the proxy voting process. At Vanguard, we take our ownership responsibilities very seriously and believe the right to vote proxies for our fund holdings is a significant asset of the funds. We exercise our voting responsibilities as a fiduciary, solely with the goal of maximizing the value of our funds’ and our shareholders’ investments.

The Vanguard funds’ Board of Trustees has established a Proxy Oversight Group, a committee of senior Vanguard officers, to oversee voting policies and decisions for the funds. The group performs its responsibilities in accordance with proxy voting principles established and approved by the funds’ Board of Trustees to ensure that the funds’ voting policies reflect a thorough analysis of the issues and their potential impact on shareholder value. These principles frame our analysis of each proxy issue and provide a basis for decision-making in even the most complex instances. In evaluating issues, the Proxy Oversight Group may consider information from many sources, including the portfolio manager for the fund, management of a company presenting a proposal, shareholder groups, and independent proxy research services. In all cases, however, the ultimate decision rests with the fiduciaries who serve on the Proxy Oversight Group and are accountable to the funds’ Board of Trustees.

Our proxy voting principles are summarized below, with specific examples of voting decisions for the types of proposals that are most frequently presented.

Election of the Board of Directors

We believe that good governance starts with an independent board, unfettered by significant ties to management, all of whose members are elected annually. In addition, key board committees should be entirely independent.

ü We will generally support the election of directors that result in a board comprised of a majority of independent directors.

ü We will withhold votes for non-independent directors who serve on the audit, compensation and/or nominating committees of the board.

ü We will hold directors accountable for the actions of the committees on which they serve. For example, we will withhold votes for nominees who serve on the compensation committee if they approve excessive compensation arrangements or propose unduly dilutive equity-based compensation plans.

ü We will support efforts to de-classify existing boards, and will block efforts by companies to adopt classified board structures.

Approval of Independent Auditors

We believe that the relationship between the company and its auditors should be limited primarily to the audit engagement, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence.

ü We will vote against proposed auditors where non-audit fees comprise more than 50% of the total fees paid by the company to the audit firm.

ü We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether we believe independence has been compromised.

Equity-Based Compensation Plans

We believe that appropriately designed equity-based compensation plans, approved by shareholders, can be an effective way to align the interests of long-term shareholders and the interests of management, employees, and directors. Conversely, we are opposed to plans that substantially dilute our ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features.

ü We will generally vote against plans where total potential dilution (including all equity-based plans) exceeds 15% of shares outstanding.

ü We will generally vote against plans if annual option grants have exceeded 2% of shares outstanding.

o These total and annual dilution thresholds are guidelines, not ceilings, and when assessing a plan’s impact on our shareholdings we consider other factors such as the nature of the industry and size of the company.

ü We will vote against plans that have any of the following structural features:

o Ability to re-price underwater options

o Ability to issue options with an exercise price below the stock’s current market price

o Ability to issue reload options

o Automatic share replenishment (“evergreen”) feature

ü We will support measures intended to increase long-term stock ownership by executives. These may include:

o Requiring senior executives to hold a minimum amount of stock in the company (frequently expressed as a certain multiple of the executive’s salary)

o Requiring stock acquired through option exercise to be held for a certain period of time

o Using restricted stock grants instead of options

§ To this end, we support expensing the fair value of option grants because it substantially eliminates their preferential financial statement treatment vis-à-vis stock grants, furthering our case for increased ownership by corporate leaders and employees.

ü We will support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value.

Corporate Structure and Shareholder Rights

We believe that shareholders should have voting power equal to their equity interest in the company and should be able to approve (or reject) changes to the corporation’s by-laws by a simple majority vote.

ü We will support proposals to remove super-majority (typically from 66.7% to 80%) voting requirements for certain types of proposals. We will vote against proposals to impose super-majority requirements.

ü We will vote in support of proposals to lower barriers to shareholder action (e.g., limited rights to call special meetings, limited rights to act by written consent).

ü We will vote against proposals for a separate class of stock with disparate voting rights.

ü We will generally vote in support of proposals to subject shareholder rights plans (“poison pills”) to a shareholder vote. In evaluating these plans, we will be more likely to support arrangements with short-term (less than 3 years) sunset provisions, qualified bid/permitted offer provisions (“chewable pills”) and/or mandatory review by a committee of independent directors at least every three years (so-called “TIDE provisions).

Corporate and Social Policy Issues

We believe that “ordinary business matters” are primarily the responsibility of management and should be approved solely by the corporation’s board of directors. Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices.

ü We generally vote against these types of proposals, though we may make exceptions in certain instances where we believe a proposal has substantial economic implications.