Vanguard's approach to investment stewardship
19 September 2018 | Topical insights
Vanguard has released its 2018 Investment Stewardship Annual Report, outlining our advocacy, engagement and voting activities for the 12 months ended 30 June 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 US and UK, 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. To put this into context, 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.
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 governanceFour pillars serve as the foundation of our programme, 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 incentivises 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 favour 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.
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 behaviours 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.
Additionally, 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.
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.
You talked about engaging with companies. 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.
Vanguard’s 2018 Investment Stewardship Annual Report can be accessed here.
Investment risk information:
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.
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