In an open letter to the directors of public companies, major institutional investor Vanguard outlined the "four pillars" of effective corporate governance practices they use to evaluate companies while detailing a few of the key governance themes deemed most important. The four pillars, which underpin Vanguard's Investment Stewardship program, are the basis on which Vanguard evaluates companies. Vanguard's approach is particularly notable given the strategies
- The Board: A high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices.
- Governance Structures: Provisions and structures that empower shareholders and protect their rights.
- Appropriate Compensation: Pay that incentivizes relative out-performance over the long term relative to peers and competitors.
- Risk Oversight: Effective, integrated, and ongoing oversight of relevant industry- and company-specific risks.
According to Vanguard, implementing these four pillars will drive long-term value. The letter continues, further detailing some more best practices believed to foster good results.
- Boards Set the Tone On Governance: Noting that the board needs "the right mix of skill, expertise, thought, tenure, and personal characteristics" Vanguard states that a "thoughtfully composed, diverse board more objectively oversees how management navigates challenges and opportunities critical to shareholders' interests. Vanguard addresses gender diversity specifically, noting that “[g]ender diversity is one element of board composition that we will continue to focus on over the coming years” and that Vanguard “expects boards to focus on it as well.”
- Boards Lead Risk Monitoring: Stating that shareholders rely on a "strong board to oversee the strategy for realizing opportunities and mitigating risk", Vanguard notes its support for climate risks while noting there is no one-sized fits all approach. Vanguard’s support for climate risk disclosure is notable with the investor even noting its participation in SASB and the point concludes by noting that all market participants must "embrace the disclosure of sustainability risks that bear on a company's long-term value creation prospects."
- Engagement Is Necessary for Progress and Understanding: Vanguard notes that effective engagement with companies about not only ballot issues, but other issues, including compensation and board composition, is of vital importance. On that point, Vanguard’s 2017 Stewardship Report notes that compensation is the second most frequent topic discussed in issuer engagements (55% of the time) just behind governance structure (discussed 58% of the time).
As noted above, Vanguard's letter is interesting in that it provides a much more hands-off approach to governance changes than pushed by other investors, for example, the September 2017 NYC Comptroller letter seeking Board matrices. However, the letter does denote certain expectations the investor has, including potential ESG obligations.