Fidelity, Vanguard Skate in Home Depot Pay Scandal

The problem lies with those on the other side of the trade -- the people hiring the executives. The people who are involved in the negotiations, namely the directors, aren't particularly motivated. They don't get paid very much, at least by heavy-hitter standards. And it isn't their money that's involved. No wonder they just outsource the calculations to "consultants" whose biggest interest is in keeping the executive class happy.

Meanwhile, the people who are motivated to get the best price, namely the shareholders, aren't really involved. Which is why attention should turn to those who are supposed to represent them. Mutual fund managers have a fiduciary responsibility to their investors. Letting someone lift some of their clients' cash in this way would be like a bank manager forgetting to lock up when he goes home.

Fund managers each control large blocks of shares. Fidelity alone has about 5% of Home Depot stock. If it started taking a serious stand against outsized executive pay, the practice would stop. Simple as that. Instead, most fund managers have an abysmal record in this matter. They tend to just wave the executive pay reports through each year.

Consider the key Home Depot stockholders' meeting last year, when a rebel shareholder finally forced the issue of Nardelli's pay package.

I looked through regulatory filings to see how Home Depot's 10 biggest mutual fund investors voted at the meeting. Five of those funds were controlled by just two companies: Fidelity and Vanguard. Those funds are Fidelity Growth & Income (FDGRX Quote)fund , Fidelity Dividend Growth (FDGFX Quote)fund and Fidelity Growth Company(FDGRX Quote)fund , and Vanguard's 500 Index(VFINX Quote)fund and Institutional Index(VINIX Quote)fund funds.

Those funds backed up Nardelli and the board on all the key issues, including the re-election of directors. So did American Funds' Washington Mutual fund (AWSHX Quote)fund . Bill Miller's Legg Mason Value Trust(LMVTX Quote)fund straddled the fence. It voted to re-elect the directors, but did back shareholder proposals to rein in executive pay and assert better corporate governance.

So out of the top 10 funds, just three stood up to the board. So let's give a cheer for Grantham, Mayo and Van Otterloo's (GQETX Quote)fund GMO US Quality Equity II fund, Putnam's Fund for Growth & Income (PGRWX Quote)fund , and the T. Rowe Price Equity Income fund (PRFDX Quote)fund .

Why did the rebels get so little support from the big guns?

Vanguard doesn't comment on its proxy votes. Neither does Fidelity. But a spokesman at the latter company argued that the company was already taking a more activist stance on the issue of executive pay, and voted against half of all stock compensation plans that came up for a vote last year. Which raises the question of why they backed Nardelli's deal at Home Depot.