September 5, 2017

Governance: Vanguard Flexes Its Muscles

Last week, Vanguard released its 2017 proxy voting report – along with an open letter to public company boards from CEO Bill McNabb.  The letter stresses Vanguard’s long-term perspective, and sets forth its governance priorities. Meanwhile, the proxy voting report makes it clear that when it comes to asserting those priorities, the world’s largest index fund complex is more willing to throw its weight around.

The message that Bill McNabb delivered in his letter is an increasingly familiar one – it’s time for companies to improve board gender diversity & climate change disclosure. The letter also stressed the importance of engagement:

Timely and substantive dialogue with companies is core to our investment stewardship approach. We see engagement as mutually beneficial: We convey Vanguard’s views and we hear companies’ perspectives, which adds context to our analysis.

Our funds’ votes on ballot measures – 171,000 discrete items in the past year alone — are an outcome of this process, not the starting point. As we analyze ballot items, particularly controversial ones, we often invite direct and open-ended dialogue with the company. We seek management’s and the board’s perspectives on the issues at hand, and we evaluate them against our principles and leading practices.

To understand the full picture, we often also engage with other investors, including activists and shareholder proponents. Our goal is that a fund’s ultimate voting decision does not come as a surprise. Our ability to make informed decisions depends on maintaining an ongoing exchange of ideas in a setting in which we can cover the intention and strategy behind the issues.

The proxy voting report demonstrates that Vanguard continues to ramp up its engagement efforts.  In 2017, it engaged with 954 companies – a nearly 40% increase over the 685 companies that it engaged with in 2015.

Moreover, the report shows that Vanguard is willing to vote against management when companies aren’t responsive to its engagement efforts.  For example, Vanguard voted for a shareholder resolution calling for a gender diversity policy at a Canadian company because it concluded that the company wasn’t responsive to its concerns about diversity.  For the first time, it also supported several climate change proposals – including one at ExxonMobil.

But Vanguard isn’t just sending a message to public company boards – as this Wachtell memo notes, its actions send an equally strong one to activists calling for index funds to relinquish their vote in contested situations:

With respect to activist and academic-sponsored attacks on the major index funds’ ability to participate in contested situations, Vanguard’s commitment to prioritizing responsible and long-term oriented investment stewardship is clear, having refused to outsource voting decisions to proxy advisory firms, doubled their internal team’s size since 2015, developed an intensive sector-based approach to analysis, engagement and voting and accessed the investment talent across Vanguard’s Investment Management Group and the 30 other investment firms managing Vanguard’s active portfolios.

Vanguard has been criticized for not being as active when it comes to governance issues as its peers BlackRock & State Street, but after some prodding from its own investors, it appears that the once slumbering giant is now wide awake.

New SEC Commissioner Nominee: Robert Jackson

On Friday, President Trump nominated Columbia law prof. Robert Jackson to fill one of the two remaining vacancies on the SEC.  Here’s the White House’s announcement of Jackson’s nomination.  Jackson would fill a Democratic slot on the SEC & would definitely make the meetings more interesting – he’s a leading advocate of a rule mandating disclosure of corporate political spending.  In the past, Jackson’s also crossed swords with the SEC over the agency’s FOIA compliance.

In addition to the nomination of a new Commissioner, the SEC recently announced a number of appointments to Chair Jay Clayton’s executive staff.

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John Jenkins