In its third annual investment stewardship report, Vanguard reiterated its call for greater diversity among boards of directors at public companies and highlighted the key factors that the $5.7 trillion behemoth expects of a strong board as well as a good corporate citizen in which it invests.

These factors include that the board of directors: publish their views on diversity, disclose their board diversity measures, broaden their search for candidates and report the progress against those outcomes. Vanguard’s bottom line is it believes good governance is the key factor in a well-run company and makes it a long-term sustainable investment.

“We believe that good governance practices — thoughtful board composition, effective oversight of company strategy and risks, aligned pay for performance, and strong provisions to empower shareholders — are the foundation on which a company’s board of directors can build enduring shareholder value,” stated Vanguard Chairman and CEO Tim Buckley in the report.

Diversity is key to Vanguard. “We have long believed in the importance of diversity in the boardroom, and we have increasingly advocated for greater representation of women on corporate boards. We are expanding our focus to more explicitly urge boards to seek greater diversity across a wide range of personal characteristics, such as gender, race, ethnicity, national origin, and age,” the company states in its report.

Vanguard notes its own actions have been aggressive on a proxy voting front, and from July 1, 2018 to June 30, 2019:

  • Vanguard funds cast nearly 170,000 individual votes in 2019, up slightly from 2018, in which 169,000.
  • Board member elections, compensation, and capitalization continued to account for the majority of ballot items.
  • Total shareholder proposals in 2019 were 5,263, down slightly from 2018.
  • 2019 number of proxy contests going to a vote was similar to 2018.
  • Of the overall number of votes cast, 93%, the same as 2018, voted for the proposal.

“Governance structures should provide an avenue for shareholders to voice their concerns and ensure the accountability of a company’s board and management,” the Vanguard report states. “We believe that shareholders should be able to hold directors accountable as needed through governance provisions such as annual elections that require securing a majority of votes. In instances where the board appears resistant to shareholder input, we also support the right of an appropriate proportion of shareholders to call special meetings and to place director nominees on the company’s ballot.”

Plus, “If a company’s practices, organizational culture, or products put people’s health, safety, or dignity at risk, they can pose a financial risk to investors too. “

The detailed report outlines that Vanguard had 868 “engagements” with global companies this past year representing $2.27 trillion in equity assets under management. Of those engagements, 79% discussed board composition, 50% met with independent directors, 45% discussed compensation, and it voted against 585 members of company board compensation committees for failing to act in response to shareholder feedback.

Further, “We engaged with more than 250 companies in carbon- intensive industries (such as energy, utilities, and industrials), and climate concerns were a more frequent discussion topic in other industries, such as insurance, transportation, and real estate. Through these engagements, we have encouraged and seen meaningful progress by many companies in overseeing the risks — and opportunities — associated with climate change. Yet many other companies remain far behind on this journey….” the report stated.

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