Last week, Vanguard released its always-informative annual letter from CEO Bill McNabb to portfolio company boards and 2017 Investment Stewardship Report for the year ended June 30th.
Both the letter and the report identify and elaborate, and the latter includes illustrative engagement and voting examples on, these four so-called corporate governance "pillars" that Vanguard deems critical to its long-termism - purportedly economics-driven - approach, and that shape its engagement and voting activities:
- Board composition: A high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices - with a particular current focus on board gender diversity, which Vanguard believes leads to outperformance and better long-termism-supporting governance practices.
- Governance structures: Provisions and structures that empower shareholders and protect their rights (e.g., annual director elections, majority voting, proxy access, multi-class share structures).
- Appropriate compensation: Pay that incentivizes relative outperformance over the long term.
- Risk oversight: Effective, integrated, and ongoing oversight of relevant industry- and company-specific risks - with a particular focus currently on climate risk and other materiality-driven, sector-specific sustainability disclosure. Note that the relevant fund's recently-filed voting report confirms the widely-held speculation (see, e.g., here and here) that Vanguard voted "For" climate-related shareholder proposals at Exxon and Occidental Petroleum.
McNabb's letter also emphasizes Vanguard's expectation that independent directors will be involved in the engagement process:
The opportunity to articulate our perspectives and understand a board’s thinking on a range of topics—anchored at the intersection of the firm’s strategy and its enabling governance practices—is a crucial part of our stewardship obligations. Although ballot items are reduced to a series of binary choices—yes or no, for or against—engagement beyond the ballot enables us to deal in nuance and in dialogue that drives meaningful progress over time.
There is a growing role for independent directors in engagement, both on issues over which they hold exclusive purview (such as CEO compensation and board composition/succession) and on deepening investors’ understanding of the alignment between a company’s strategy and governance practices. Our interest in engaging with directors is by no means intended to interfere with management’s ownership of the message on corporate strategy and performance. Rather, we believe it’s appropriate for directors to periodically hear directly from and be heard by the shareowners on whose behalf they serve.
Noteworthy US-specific voting statistics in the 2017 Investment Stewardship Report include:
- Vanguard voted FOR 47% of board-related shareholder proposals in 2017 - up from 17% in 2016, and FOR 88% of board-related (other than election of directors) management proposals in 2017 - down from 97% in 2016.
- It voted FOR 96% of management's director election proposals in 2017, up from 95% in 2016.
- It voted FOR 96% of management's SoP proposals in 2017, reflecting no change from 2016, and FOR 86% of other compensation-related management proposals in 2017 - up from 83% in 2016.
- It voted FOR 40% of governance-related shareholder proposals in 2017, down from 41% in 2016.
- It voted FOR 1% of environmental/social shareholder proposals in 2017 - reflecting no change from 2016.
- It voted FOR 86% of management capitalization-related proposals, up from 81% in 2016.
Also eye-opening is the fact that globally, 16% of Vanguard's engagements over the past year involved discussion of proxy contests and "contentious transactions." The report comments on Vanguard's approach toward activism:
We evaluate activist situations case by case and study the individual merits of each circumstance with the goal of achieving the best long-term outcome for shareholders. Although activists may often raise legitimate questions and can create a sense of urgency at companies, they must also make a strong strategic case for the changes they seek and back it up with capable director nominees to earn our support.