Vanguard writes to global companies specifying engagement priorities

8 September 2017

Editor

EU regulation

Global investment firm Vanguard has written an open letter to the directors of public companies worldwide specifying its priorities that it will engage with firms about as part of its stewardship programme.

The letter, from its chairman and chief executive William McNabb, stressed that Vanguard is a long term investor - shares in its index funds could be held almost indefinitely while even its active funds would typically hold its shares for more than 10 years. The fund manager also indicates that it believes well-governed companies are more likely to perform well over the long run. Vanguard said it had four pillars on which it evaluated corporate governance practices and which guided its engagement and proxy voting policy.

These are:
(1) The board: A high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices.
(2) Governance structures: Provisions and structures that empower shareholders and protect their rights.
(3) Appropriate compensation: Pay that incentivizes relative outperformance over the long term.
(4) Risk oversight: Effective, integrated, and ongoing oversight of relevant industry- and company-specific risks.

Vanguard highlights gender diversity on boards and climate risk as two areas that companies needed to be aware of and it would be monitoring. The letter stated: "There is compelling evidence that boards with a critical mass of women have outperformed those that are less diverse. Diverse boards also more effectively demonstrate governance best practices that we believe lead to long-term shareholder value. Our stance on this issue is therefore an economic imperative, not an ideological choice."

In relation to climate risk Vanguard said its views, like those on diversity, were based on the economic bottom line for its investors. The letter stated that: "Our participation in the Investor Advisory Group to the Sustainability Accounting Standards Board (SASB) reflects our belief that materiality-driven, sector-specific disclosures will better illuminate risks in a way that aids market efficiency and price discovery. We believe it is incumbent on all market participants—investors, boards, and management alike— to embrace the disclosure of sustainability risks that bear on a company’s long-term value creation prospects."

The fund manager also recently published its annual stewardship report which showed it had engaged with 954 companies in the 12 months up to 30th June 2017 compared with 817 in 2016 and 685 in 2015. It had voted in 18,905 meeting this year an increase from 16,740 last year and 12,785 in 2015 although the number of countries voted in fell to 68 compared with 70 in the previous two years.

As a large global institutional investor Vanguard has been under scrutiny for how it engages with companies. Socially responsible investor, Walden Asset Management recently declared its engagement with Vanguard a success following more commitments surrounding diversity and climate change and withdrew resolutions due to be tabled at one of its mutual fund meetings.

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