Vanguard 's 2018 Investment Stewardship Annual Report was recently released and focused on the investor's "Four Pillars" of governance: board composition, executive compensation, risk and strategy oversight, and shareholder-friendly governance structures.
Noting that Vanguard increased the number of company engagements by a whopping 63% between 2014 and 2018, and the company engaged with 700 portfolio companies across its holdings, the report highlighted that more than 50% of engagements included a discussion of board composition and compensation. In addition, Vanguard supported 4 of 9 gender diversity proposals that made it to ballot and supported 11 of 76 ESG proposals (although this is still a low support rate, it is up from 2 of 92 proposals in 2017). Vanguard also voted against more than 300 compensation committee members for failing to act in response to shareholder feedback and included independent directors in 40% of all engagements.
The annual report explains the three main types of engagement from Vanguard (event-driven, topic-driven and strategic) and includes a number of actual company engagement summaries with names removed, which may prove useful to companies for whom Vanguard is a major shareholder. Important highlights of the report include:
- Gender Diversity. Vanguard voted against several companies that had no women on their boards and either resisted adding women or resisted making additional disclosure. In 2017, Vanguard joined the 30% Club, which advocates for greater gender diversity on boards.
- Executive Pay. Vanguard focused on alignment of pay with relative financial performance and the magnitude of total compensation in its engagement discussions. The investor supported an activist investor demanding change to a portfolio company's pay practices, leading to the company changing its practices before the vote. A U.S. consumer discretionary company lost Vanguard's support over a large retention award for the CEO, despite his long-term high performance, because "the level of compensation relative to peers" and "the lack of a compelling link to shareholder returns compared with the firm's competitors." The investor also engaged with a U.S. financial services company whose CEO was paid significantly more than peers due to an overly short-term focused incentive plan.
- Risk and Strategy. Vanguard engaged on the corporate role in the opioid crisis as well as gun companies' risk management and sustainability plans. In addition, the investor provided instances where it supported a sustainability proposal at one company while rejecting it at another, based on the differing levels of responsiveness and commitment to disclosure of the two companies.
- Activism. Vanguard noted it supported activist investors in five of 13 proxy contests that went to a vote in the past year, noting that Vanguard (which is essentially a permanent investor) may support activists when they make a strong case for changes they seek and back that up with a good slate of director nominees.