As previously reported, in April, Vanguard released updated Environmental & Social proxy voting guidelines (§V) that provide for evaluation of each E&S shareholder proposal "on its merits" and a corresponding "for" or "against" vote, rather than relying on abstentions, which it often used historically to signify its view that oversight and associated judgments on these sorts of issues generally remained within the purview of the board. The updated guidelines indicate that among the factors Vanguard will consider when evaluating these types of proposals are: (i) the materiality of the issue, (ii) the quality of current disclosures/business practices, and (iii) any progress by the company toward the adoption of best practices and/or industry norms when evaluation.
In this newly-released interview (pg. 3) with Proxy Insight, Vanguard Head of Portfolio Company Engagement, Analysis and Voting W. Robert Main III elaborates and provides important clarity on the investor's approach to these types of issues:
First, we focus on the materiality of a proposal. In other words, does this issue have a material long-term impact on the company’s business—and our investment? To help us determine that materiality threshold, we use the standards provided by the Sustainability Accounting Standards Board. The second factor we look at is applicability. We ask, are the changes stipulated by the proposal applicable for the company within its industry? We have found information from MSCI to be helpful in our evaluation. After that, we seek to engage directly with members of a company’s board to better understand how they oversee, control and disclose risks. Finally, our own sector-based investment stewardship teams evaluate how a company’s disclosures and best practices compare to those of its peers. If there is a clear link between the proposal and long-term value creation, then we may support that proposal.
The broadly-scoped interview also elicited this comment from Main, adding further color to Vanguard's approach to SoP (§III.D): "We look at relative metrics and total shareholder return as important components of long-term incentive plans. It is incredibly important that we see long-term alignment between a company’s pay and its strategy."
Also noteworthy is Main's remark in the broader context of Vanguard's investment stewardship approach that Vanguard is "particularly interested in engaging directly with board members." Note that although 80% of director respondents in Spencer Stuart/NYSE Governance's latest annual "What Directors Think" (reported on here) agreed that meeting with investors (outside of the annual meeting) is a governance best practice that helps gain shareholder support and alleviate concerns before they escalate, more than 83% of the 197 corporate respondents to a March 2017 Society Quick Survey said that their independent directors don't engage with investors without management, and more than 70% said that it is unlikely that their company is open to that - positions that appear to be inconsistent with the evolving expectations of many institutional investors.