Our proxy voting and engagement efforts: An update
For the 12 months ended June 30, 2014
We characterize our approach to governance as “quiet diplomacy focused on results.” Importantly, we make voting decisions based on the Vanguard funds’ guidelines and analysis, not the recommendations of third parties. Consequently, we frequently engage in discussions with the directors and managers of companies owned by Vanguard funds. These discussions permit a more nuanced and precise exchange of views than the blunt instrument of a shareholder vote.
Below, we explain our approach to voting and advocating for effective governance of portfolio companies. A record of how Vanguard mutual funds voted during the 12 months ended June 30 is also available.
Voting at companies’ shareholder meetings is an important aspect of our role as a fiduciary acting in the long-term interests of our investors. To that end, we employ a team of governance analysts responsible for evaluating proxy proposals in the context of guidelines adopted by each of our funds’ boards of trustees. These guidelines reflect long-standing views on what we believe are the optimal governance structures that strike the appropriate balance between the rights and responsibilities of owners, managers, and directors.
In the past 12 months, Vanguard funds voted by proxy at more than 12,000 company meetings covering 120,000 items such as director elections, auditor ratifications, compensation plans, mergers, acquisitions, and other management or shareholder proposals. The following provides a more detailed discussion of the categories of proposals we vote on most frequently (specifically, director elections, compensation, and other corporate or shareholder proposals). Our voting record is summarized in the table at the bottom of this page.
Director elections. Board elections constitute one of the most critical areas of governance, because shareholders rely on directors to monitor management. Over the past 12 months, we supported 92% of director nominees. We voted against the remainder primarily because of concerns about candidates’ independence, attendance, or actions taken by a committee on which they served. In a handful of situations, we withheld votes from directors who failed to observe good governance practices or showed a disregard for shareholder interests.
Compensation. We dedicate considerable effort to ensuring that compensation programs align the interests of executives with those of shareholders. In the United States, our votes reflected our views on compensation as follows:
- We supported 94% of nonbinding “Say on Pay” compensation proposals.
- We supported 86% of binding votes on equity compensation plans.
- We voted against nearly 400 directors who served on compensation committees.
We were most likely to vote against compensation plans because of concerns about whether they incentivized long-term performance or could result in excessive dilution of current shareholders. We also engaged companies to encourage positive changes. For example, we discussed compensation matters directly with nearly two-thirds of the midsize or large companies prior to voting against compensation. We made progress: Of the companies where the funds voted against compensation and engaged on this issue in 2013, three-quarters made improvements reflecting our feedback.
Corporate proposals. We voted in favor of 97% of proposed mergers and acquisitions, supporting them if our analysis showed they would contribute to long-term value. A number of other company proposals ask for authorization of new shares or technical amendments to governing documents. We supported approximately 95% of the proposals to authorize additional shares or to make other capital structure changes; we voted against such proposals when they were unreasonably dilutive to current shareholders. In reviewing charter and bylaw proposals, we considered how the changes would affect shareholders' rights.
Shareholder proposals. Shareholders put forth proposals on issues ranging from governance to environmental or social policy changes. We are most likely to support changes that are consistent with our governance principles, such as annual elections for a board of directors. We typically abstained from voting on proposals that sought additional reporting or corporate policy changes on environmental or social matters. While companies' practices in these areas are topics that we discuss through engagement where they may be relevant to shareholder value, we believe these matters are generally the province of management and the board unless the proposals would have a significant, tangible impact on the value of a fund's investment. For more information, please see Vanguard's view: Social concerns and investing.
Engagement with companies
Although voting is important, we consider it the tip of the iceberg regarding our involvement as shareholders. Our voting activities tell only a small part of the story as it relates to our corporate governance program. Engagement with companies in which Vanguard funds invest is where we induce the most change. During our conversations with company leaders, we strive to provide constructive input that will better position companies to deliver sustainable value over the long term for all investors.
Over the past 12 months, we directly communicated with more than 1,100 companies representing $1.3 trillion in Vanguard fund assets. We were most likely to reach out to a company for one of three reasons:
- We are preparing to vote at the shareholder meeting.
- An event has occurred at the company that could affect stock value.
- We have a specific governance concern that is not on the ballot.
Our engagements take a number of forms, including conference calls or in-person meetings with executives or directors, formal letters requesting change, or participation in broader initiatives advocating change.
Direct conversations with company managers and directors were the dominant form of engagement. In the past 12 months, we spoke with the management or directors of nearly 600 companies encompassing approximately $800 billion in Vanguard fund assets. We also participated in two initiatives to provide a framework for companies and investors to consider as they evaluate engagement: the Shareholder Director Exchange (SDX) and the Conference Board's Guidelines for Investor Engagement. Although engagement is nothing new for a significant number of companies, it is an alien concept for others. As a result, we believe that communicating to the broader market what has worked well can elevate the dialogue for the benefit of all investors.
In addition, we sent formal written communications to the chairpersons and CEOs of nearly 1,000 of our largest holdings. We customized our communications based on specific changes we wanted to see. Nearly 350 of these communications included requests for companies to remove problematic governance structures (such as classes of stock that disproportionally give one class more votes, or staggered director elections) or to revisit compensation policies. To date, nearly one half of the companies followed up and more than 80 have also made, or committed to try to make, at least one of the changes. We are still receiving responses as companies address our requests at board and shareholder meetings.
Voting and engagement in practice
Here are several examples of how our informed voting and engagement has influenced positive change:
1. Improving CEO compensation practices. We raised concerns with the board of a large technology company regarding potential disconnects between pay and performance created by a significant stock grant that would vest regardless of company performance. After numerous conversations—and votes against a Say on Pay measure and directors on the compensation committee—the company's CEO took the lead in agreeing to apply performance criteria to his existing award, as well as to any future awards. This company's willingness to reopen the negotiation of a previous award has given other companies a strong example to follow.
In another instance, we expressed our concerns to the board of a large health care company about their CEO's sizeable pension, which we believed created a disconnect between pay and performance. Following our votes against a Say on Pay measure and discussion with the compensation committee, the board improved the pension arrangement and overall pay design. The company also strengthened the responsibilities of its lead independent director, ensuring that shareholders have a strong advocate in the boardroom.
2. Supporting governance reform. A large oil-and-gas company faced a proxy contest to replace five directors. An activist hedge fund cited concerns regarding board composition, along with problematic executive compensation and governance provisions. We engaged with both parties and outlined specific changes that we wanted to see. In response, this company added new independent directors and improved shareholder rights. The company and the hedge fund ultimately reached a settlement, which also resulted in several new, Independent directors being added to the board. In subsequent discussions, we've learned that the reconstituted board has a stronger working relationship.
3. Holding a board accountable. Shareholder dissatisfaction with both the performance and governance of a U.S. real estate company culminated in the replacement of the entire board—a move we supported. Despite engagement with management and directors that yielded some improvement in the situation, the activist investor who initiated corrective action nominated a new slate of directors with excellent credentials and a plan to substantially overhaul the alignment of the company’s incentive structure and governance. Transition under the new board is well under way, and we are pleased with the results thus far. Although this is an extreme example of an infrequent occurrence, it nonetheless demonstrates the value of—and our willingness to employ—appropriate mechanisms for shareholders to effect change when necessary.
4. Advocating for independent oversight. We generally believe that a majority of directors should be independent from management, regardless of a company's location. For example, Japanese companies have become increasingly receptive to dialogue with shareholders, and our conversations are becoming significantly more frequent. We have used these conversations to advocate for a greater degree of director and statutory auditor independence, and we monitor changes over time. In one instance, a Japanese brewing company with which we engaged added another independent statutory auditor, resulting in a majority of auditors being independent.
5. Improving governance at small companies. With many small- and mid-capitalization companies, the Say on Pay proposal is often the impetus for our engagements. Although compensation may drive these discussions, we use the opportunity to advocate for governance and other changes that will benefit shareholders as well. For instance, we often address our preferences for annual director elections and a majority voting standard. Both these practices, already in place at most large-cap companies, continue to gain traction among smaller companies. For instance, since 2012, more than 30 small and midsize companies that we engaged with have established either annual director elections or a majority vote standard.
How Vanguard funds voted
July 1, 2013–June 30, 2014
|Management proposals||Number of proposals voted on||% voted for management recommendation|
|Directors and board-related||61,505||91%|
|Capital structure change||13,470||95%|
|Ratification of auditors and auditor-related||8,425||97%|
|Mergers, acquisitions, and reorganizations||2,390||97%|
|Directors and board-related||1,785||23%|
|Environmental and social issues||265||52%|