Blogs

Vanguard's newly-released Investment Stewardship Annual Report - which captures its investment stewardship activities for the 12 months ended June 30th - reveals stepped-up engagement based in its four pillars of good governance - board composition, executive compensation, risk & strategy oversight, and governance structures (as reported on here) - all encompassed within an overarching long-termism theme.   

Aside from noteworthy big picture statistics like the fact that Vanguard discussed board composition in over half - and executive compensation in about half - of its engagements, voted in favor of four of nine board gender diversity proposals (based on company-specific facts and circumstances) and against 318 Compensation Committee members for failing to act in response to shareholder feedback, and supported activist investors in five of 13 US proxy contests that went to a vote, the report includes a number of instructive narratives in the form of engagement case studies and focused insights.

The discussion concerning board oversight of risk and strategy (beginning page 20), the relationship between the two, and how that plays out in Vanguard's expectations of boards and its engagement activities, is particularly read-worthy. Notable excerpts include:

- Senior Strategist Marc Lindsay's insights on sustainability risks & opportunities:

When evaluating sustainability practices, we primarily focus on two areas: risk oversight and disclosure.

1. Risk oversight: We look for competent boards that are educating themselves on sustainability issues, even if these issues weren't historically part of their focus. We also encourage boards to seek out third-party perspectives and information instead of relying solely on the opinions of management. Most important, we expect boards to be actively evaluating these issues and integrating sustainability risks—and the related business opportunities—into their strategic decision-making.

2. Disclosure: We encourage companies to provide consistent, comparable, decision-useful disclosure on sustainability risks. This includes both historical data and forward-looking information so that the market has context for what companies have done, what they plan to do, and how their governance structures enable the right decisions. We are not looking for more disclosure for disclosure's sake; rather, we hope to see companies, investors, and other stakeholders partner together to identify what information is truly relevant and material.

- This Q&A with Senior Strategist Brian Denney:

How does Vanguard talk with companies about risk oversight?

Mr. Denney: We ask directors and executives a range of questions about it. These questions are not perfunctory. Risk oversight is arguably one of the most important topics that we discuss with companies and a reason for time intensive discussions during engagements. Company boards can expect us to ask questions such as:

- How do management and the board oversee risk? How frequently do risk conversations take place, and who participates?
- What type of risk reporting does the board receive? How often?
- How does the board ensure it is hearing independent external perspectives, especially ones that may differ from the views of management?
- How does the board identify red flags that alert it to potential areas of concern? How does the board ensure that these matters are elevated to the board just as swiftly as positive news?
- Given that a board meets only periodically through the year, and often only with management, what specific steps does the board take to understand the company's business culture and ensure that it reflects the company's espoused values?

We believe that boards that are able to describe a robust and evolving risk framework will be better positioned to prevent these types of governance failures. Such boards are also more likely to respond appropriately if a failure occurs and are more likely to be supported by shareholders in the aftermath of a crisis.

Also notable is this observation from CEO Tim Buckley: "In response to our voice and others', more and more companies are adopting a long-term focus. Although pockets of poor governance remain, overwhelmingly we've seen companies adopt governance best practices shown to support long-term returns, and companies have increased disclosure about key risks to their business that may undermine long-term value creation. Corporate boards around the world are also spending more time communicating with their longest-term investors, with whom their interests are so closely aligned."