Vanguard created its stewardship team nearly 20 years ago with responsibilities for voting as well as engagement across all equity index funds. On behalf of our investors, we exercise voting rights (known as proxy voting) and we speak with companies on a range of issues that we identify through data analysis and research.
Our global investment stewardship team meets (or engages) with hundreds of companies every year. We talk directly to board members and company executives about how they are governing material risks and we hold them accountable for good governance practices. We believe that engaging actively with companies in this way can be a more effective way to encourage proper risk oversight than selling a stock.
Engagement essentially starts with reviewing our portfolio companies. We talk to the companies that represent the largest holdings in our portfolios and also identify any companies where we may need to talk about specific material risks to their business. These could include climate change or social risks in their communities or workforces as well as issues related to board diversity, succession planning and how they have responded to recent incidents. We talk to the chairs and chief executives to determine how they assess these risks and disclose them to the market.
We find that companies value the perspectives of long-term investors. An oil company, for example, might ask what type of climate disclosures would be helpful for investors. This is a good opportunity to set out what more the company could be doing and hold it accountable for progress.
We don’t dictate company strategy, but we want to understand a company’s strategy and know that the company is well-governed. Good governance starts with a good board of directors. We want assurances that a board has the right people, the right experience, appropriate diversity (in terms of skills as well as personal characteristics), is independent and can challenge executives.
What you measure, you manage
Effective disclosure of material risks by companies is essential if investors are to understand those risks and how companies are taking appropriate steps to manage them.
In our engagements with companies where climate change is a significant risk, for example, we expect boards to have sufficient expertise in climate change to understand how it could affect their business. We expect the board to apply independent oversight of those risks and to set appropriate climate-risk mitigation targets that are aligned with the goals set out in the Paris Agreement2. Finally, and critically, we expect boards to disclose climate risks using investor-focused frameworks, such as the Task Force on Climate-Related Financial Disclosures (TCFD).
Voting where we don’t see progress
We believe our year-on-year engagements with companies can be an effective way to protect the interests of investors. The funds can also vote to raise concerns when a company fails to make progress or is unresponsive to the market.