Vanguard Sets Boundaries on Governance

Vanguard has updated its 2022 proxy voting guidelines on three areas of key interest to CHROs and Heads of Total Rewards – board composition, board diversity and overboarding. However, a recent PJT Camberview interview with Vanguard’s Global Head of Investment Stewardship, John Galloway, highlighted some fascinating nuances in Vanguard’s approach to these and other corporate governance issues as the stakeholders involved get further from the mean.

• On ESG Metrics. Galloway made it clear Vanguard is not asking for companies to tie pay to ESG. “We know that some companies have gotten the impression that they need ESG metrics in their plans. To be clear, we are not asking for this. If companies believe ESG metrics are appropriate to align executive compensation with shareholder value, we ask that these metrics be measurable…our view is that when these metrics are poorly constructed, they can be a boon to pay without any impact on shareholder value over time.”
  
  
• On ESG Proposals. “Vanguard’s sole focus is on long-term shareholder value. We have no other objectives. We know that inattentiveness to certain environmental and social issues creates risk to long-term shareholder value. There are many cases where we determine that shareholder proposals address material risks or mitigation of risks, and, therefore, we support them.”
  
  
• On Too Many Proposals. “In the past, we have had concerns if a board was not responsive to shareholder feedback. Now there is a recognition that proposals are increasingly being put forth for a variety of reasons, some of which may not be tied directly to the creation of long-term value. As a result, proponents’ motivations and objectives, and the nature of their engagement with companies, are becoming a more important element of our assessment of proposals and company actions.”

 The interview highlighted the unique situation in which we currently find ourselves, where shareholder proposals may be driven by non-investor stakeholders and where even shareholder proposals that pass with a majority of shareholder support may be only loosely linked to shareholder value.  Vanguard seems to be indicating that as a long-term investor, they may view current initiatives differently (and possibly, be less supportive) as compared to more traditional investor positions.