Investment stewardship at Vanguard

October 2, 2018

 

Key highlights

  • Vanguard engages with companies and votes proxies to provide a voice for Vanguard fund investors in corporate boardrooms. We aim to encourage companies to act in a way that will drive long-term value.
  • We never have a quota for how the funds should vote, and we are not driven by any political, social, or environmental agendas. If a proposal runs counter to long-term shareholder value, the funds will vote against management.
  • We don't tell company leaders how to run their businesses. We simply seek to understand how boards oversee companies, disclose material risks to long-term value, and represent the best interests of their shareholders.
 
Glenn Booraem

Glenn Booraem

Vanguard has released its 2018 Investment Stewardship Annual Report (orderable at the bottom of this article), outlining our advocacy, engagement, and voting activities for the 12 months ended June 30, 2018. In the interview below, Investment Stewardship Officer Glenn Booraem addresses some of the most common questions about these activities.

What does the Vanguard Investment Stewardship team do?

We serve as the voice for Vanguard investors. Our team—which has offices in the U.S. and U.K.—stewards Vanguard funds' global equity holdings in three main ways:

First, we advocate on behalf of Vanguard fund investors, by championing the highest standards of corporate governance.

Second, we engage with company executives and directors to understand their governance practices and to share our perspectives and expectations. In the most recent proxy year, we met with 721 companies.

And third, we vote proxies at company shareholder meetings across each of our portfolios and around the globe. In the past year, we voted on nearly 169,000 ballot items.

Learn what we believe great corporate governance looks like, understand our policies and guidelines, and access detailed fund voting records at our dedicated Investment Stewardship site.

Why is investment stewardship important to Vanguard if a majority of our assets under management are in index funds?

It starts with a concept that is both simple and powerful: An index fund tracks its benchmark index and therefore will invest in a company practically forever—or as long as the company is part of the benchmark.

So if we really like the stock of Company XYZ, for example, we can't buy more. If we don’t like the stock, we can't sell out of it. That's why our voice and our vote are so important. We use these tools to provide a voice for Vanguard fund investors in corporate boardrooms. We aim to encourage companies to act in a way that will drive long-term value.

How does Vanguard evaluate a company's governance?

Four pillars serve as the foundation of our program, guiding everything we do.

The first is board composition: Good governance starts with a great board of directors, and we look for high-functioning, well-composed boards with effective ongoing evaluation practices.

The second is executive compensation: Pay structures should be constructed in a way that incentivizes outperformance over the long term.

Our third pillar is oversight of risk and strategy: Boards should maintain effective, integrated, and ongoing oversight of material risks and governance of a company's long-term strategy.

And our fourth is governance structures: We believe in provisions and structures that empower shareholders and protect their rights.

How would you answer critics who say that the Vanguard funds too often vote in line with companies' management?

It is important to highlight that we never have a quota for how the funds should vote. Voting is just one way the funds express Vanguard's views to companies. We believe a more effective way to encourage long-term shareholder value creation is through conversations with a board—or, as we call them, engagements. It is through engagements that we are able to open a dialogue to further understand board decisions.

If a proposal runs counter to long-term shareholder value, the funds will vote against management. At the same time, when companies demonstrate good governance and improvement over time, the funds will be more likely to vote in favor of management.

What do you say to critics who disagree with how the Vanguard funds vote on politically, socially, or environmentally driven proposals?

We are not driven by any political, social, or environmental agendas. Our core purpose is to give investors the best chance for investment success. That means engaging on topics that we believe could affect our clients’ investments. In addition to conducting corporate governance analysis, our team regularly evaluates whether and where environmental, social, or political risks could pose challenges to a company’s long-term performance.

Our attention to these—and all—topics is from the vantage point of an investor and focuses on long-term, sustainable investment returns for our fund shareholders. If we believe that a portfolio company can do more to address its approach to or disclosure of a risk, we may reflect that in our voting and in our direct discussions with the company's management and board members.

Why doesn't Vanguard disclose the details of our engagements with company directors and executives?

Just as Vanguard's approach to investing is long-term, so too is our approach to engagement with portfolio companies. Open, direct, and ongoing dialogue is crucial to informing companies' progress over time, which means both Vanguard and portfolio companies need the ability to be candid about our views and concerns. We therefore do not publicly disclose the specifics of individual engagements or our views on individual companies. The funds' voting record, however, is public.

What does a typical engagement entail?

Engagement benefits both shareholders and companies. Shareholders hear directly from company leaders and directors about strategy, risk, and governance matters, and companies gain a deeper understanding of what really matters to their long-term shareholders.

Most engagements fall into three categories: event-driven, topic-driven, or strategic.

Event-driven meetings are those where we discuss a contentious vote or ballot issue. These often take place during proxy season.

In topic-driven engagements, we want to discuss topics that may materially affect companies and that fall into the realm of board responsibilities. Examples include discussions about performance, board composition, and risk disclosure.

Strategic engagements help us understand a company’s long-term strategy so that when there are bumps in the road, we can put them into the appropriate context. It's important to note that we do not seek to influence company strategy.

What are Vanguard's views on gender diversity on company boards?

We believe that diversity among directors—along dimensions such as gender, experience, race, background, age, and tenure—can strengthen a board's range of perspectives and ability to make good decisions.

While we have discussed board composition and diversity with portfolio companies for many years, gender diversity has emerged as one dimension on which there is compelling support for its positive effects on shareholder value.

What are Vanguard's views on climate risk?

There is a growing consensus in the investment community that certain environmental, social, and governance matters can materially affect a company's long-term financial value. These include climate risk.

We pay close attention to that risk and others and we believe that management and boards should do so, too. Changing regulations, demographics, and consumer behaviors can affect business results, particularly in sectors such as energy, industrials, and utilities. We want to ensure that companies sufficiently disclose these risks so that investors and the market can value companies appropriately.

What is Vanguard's perspective on subjects drawing public attention, such as gun violence and the opioid epidemic?

Investors in Vanguard funds deserve to know that their investments are built for the long term. If a company puts people's health and safety at risk or if it's harming the environment or if it's not a good neighbor or employer in the community, that can detract from its long-term investment value.

Importantly, we don't tell company leaders how to run their businesses. We simply seek to understand how boards oversee companies, disclose material risks to long-term value, and represent the best interests of their shareholders.

 

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