The Vanguard Group, the ultimate long-term investment firm, has set clear, aggressive expectations for public companies that want its support during the 2018 proxy season and beyond. In its August 31, 2017, “open letter to directors of public companies worldwide,” Vanguard Chairman and CEO F. William McNabb III identified three emerging themes that should get the attention of just about every public company:
- “Good governance starts with a great board,” he wrote, and boards should be “high-functioning, well-composed, independent, diverse and experienced.” He said Vanguard sees the board as “one of a company’s most critical strategic assets” and “there is a growing role for independent directors in engagement” with shareholders.
- Gender diversity on the Board is “an economic imperative, not an ideological choice” because, he wrote, “there is compelling evidence that boards with a critical mass of women have outperformed those that are less diverse.” Vanguard has also said this: “We also believe that diversity of thought, background and experience, as well as of personal characteristics (such as gender, race and age), meaningfully contributes to the board’s ability to serve as effective, engaged stewards of shareholders’ interests.”
- “Directors are shareholders’ eyes and ears on risk.” He wrote of Vanguard’s “evolving position on climate risk,” and said, “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.”
This one letter with the focus on these critical themes can have a lot of impact and influence, given the source. Vanguard is one of the world’s largest investment companies – with $4 trillion in global assets under management as of December 31, 2016, and representing more than 20 million investors worldwide.
Vanguard also issued its annual report on proxy-voting activity for the year ended June 30, 2017. According to the annual report, Vanguard disclosed 954 engagements with companies, up from 817 the year before. Fifty-eight percent of engagements included discussions on governance structures, 55% on executive compensation, 52% on boards of directors (including gender diversity), 16% on activism, and 14% on risk oversight (including climate risk).
Glenn Booraem, Vanguard’s Investment Stewardship Officer, said, “We continue to address traditional governance issues, such as misaligned compensation practices, unequal shareholder voting rights and ineffective boards, and increasingly, we’ve taken stronger positions on emerging topics, including gender diversity on boards and climate risk disclosure.”
The timing of the Vanguard letter and annual report are not coincidental – they come out in time for companies to address these themes in advance of the 2018 proxy season.
So what happens next? The boards, executive management and investor relations professionals who choose to engage, and act, will likely find an increasingly interested investment community. Those who choose not to further pursue these themes may well find the same thing, especially when the time comes to count up the shareholder votes.
Now is the time to evaluate your investor relations situation and consider increasing your engagement with shareholders around the most critical and emerging issues. We can help; the first step is to contact me for a free assessment of your current situation.