In advance of the behemoth investor's release of illuminating commentary on its investment stewardship, the WSJ reported that Vanguard would be relinquishing and turning over to its active equity fund managers direct control over voting their portfolio company shares. Wellington Management - which reportedly oversees nearly half of the approximately $470 billion in equity assets (27 Vanguard funds) impacted by the shift in approach - is the primary beneficiary among Vanguard's 25 outside investment advisors that will gain direct control. Vanguard will retain its voting power on its index fund holdings and other funds it manages.
In its informative, subsequently released "Investment Stewardship Commentary," Vanguard elaborated on the new approach:
Historically, proxy voting on behalf of all of Vanguard’s index and active funds has been administered centrally by Vanguard’s Investment Stewardship team. In the first half of 2019, the boards of trustees of Vanguard’s externally managed funds instructed Vanguard to give full proxy voting privileges to the funds’ external managers, creating a greater alignment of investment management and investment stewardship on a fund-by-fund basis. The transitions are expected to be completed by the end of 2019.
Crucially, nothing has changed about Vanguard’s philosophy on proxy voting. Our Investment Stewardship program remains grounded in our four principles of good governance: board composition, oversight of strategy and risk, executive compensation, and governance structures.
We believe this move clarifies the roles and responsibilities of Vanguard’s Investment Stewardship team and those of our external subadvisors. As we have increasingly collaborated with the carefully chosen external active managers overseeing Vanguard’s active funds and as the governance ecosystem has evolved, it has become clear that integrating proxy voting and engagement activities with the manager’s investment strategy is a value-add for our fund investors.
The approaches may differ on questions of detail and emphasis, but our actively and passively managed funds share a similar goal: to invest in companies that generate consistent, long-term value for their shareholders.
Also noteworthy is Vanguard's discussion in its release about institutional vs. retail ownership and voting participation, and the corresponding significant influence of institutional investors on voting outcomes:
In 2018, institutional investors (including mutual funds) collectively held 70% of public company shares in the United States and voted 91% of the shares they held. Individual investors who directly held stocks accounted for the remaining 30% of share ownership, yet they voted only 28% of the shares they held. Some interest groups have suggested that mutual funds muffle the voice of individual investors. The truth is, mutual funds are the voice of individual investors. If Vanguard didn’t speak on behalf of its more than 20 million investors, whose voice would hold sway? That of activists? Company management? Proxy advisors?
More broadly, the thoughtful commentary provides a holistic overview of Vanguard's unique mutually owned investment company-driven stewardship approach - why and how it advocates, engages, and votes - as well as its approach to sustainable (ESG) investing, which, for Vanguard, is focused on the "G" due to the "practically permanent" investor's expectation that the board is responsible for overseeing the environmental, social, and governance issues that can potentially impact the company over the long-term.
See also these articles from CNBC, IR Magazine, and the Philadelphia Business Journal, and last week's and last year's Proxy Pulse reports on retail share ownership and voting participation during the 2018 proxy "mini-season. This post first appeared in the weekly Society Alert!