March 01, 2022
Vanguard’s Investment Stewardship team advocates for the highest standards of corporate governance at the more than 13,000 companies held by Vanguard’s internally managed equity funds. In this first of two Q&As, John Galloway, global head of Vanguard Investment Stewardship, discusses how the team addresses environmental, social, and governance (ESG) risks at portfolio companies that can affect long-term shareholder value.
Meet the expert
Galloway: Investment stewardship is the primary mechanism Vanguard uses to safeguard and promote the long-term value and investment returns of investors in our internally managed equity funds. Our program is guided by Vanguard’s core purpose: to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success.
Our activities involve researching, identifying, and advocating for strong corporate governance practices that have a link to long-term shareholder value. We publicly advocate for the highest standards of corporate governance worldwide; we engage, or hold discussions, with company boards and management teams to share our expectations of best governance practices and understand how companies look after shareholder value; and ultimately, we vote proxies at shareholder meetings on behalf of the funds. It’s important to note that, by the nature of our index funds, we do not dictate company strategy or look to influence operational decisions. We’re focused squarely on questions of good governance and effective oversight of risks that could affect shareholder value.
Galloway: Vanguard’s Investment Stewardship program is grounded in four global principles of good governance. First, a company’s board of directors is responsible for representing our (and other shareholders’) interests, so a board’s composition and effectiveness are critically important. Second, a board is responsible for oversight of company strategy and its material risks. Third, executive compensation should be linked to long-term performance and structured to incentivize a company’s outperformance of its peers. Fourth, shareholder rights—the ability of Vanguard and other investors to appropriately use our voice and our vote to safeguard and promote shareholder value—need to be robust and protected.
Our portfolio companies operate under different regulatory environments and region-specific norms that are evolving at different paces. It’s important that we understand those differences. Our four global principles are applied consistently, but regional nuances help inform our expectations and approach to specific companies.
Galloway: Given that shareholder proposals that focus on different environmental or social issues are often the ones you read about in the news, many people may be surprised to learn that those constitute a very small percentage of the 170,000-odd individual proxy ballot items that the stewardship team votes on each year for the Vanguard funds. Over the last two decades, governance practices in developed markets have matured to a point where there is general agreement on the linkage between shareholder value and things like a well-composed board, effective and independent auditors, and executive compensation structures that are aligned to shareholder value. So the bulk of our time is spent engaging with companies and their boards about these governance practices. That said, we also dedicate resources to analyzing how boards oversee new and emerging material environmental and social matters that have the potential to enhance or detract from shareholder value over time.
Galloway: By design, an index fund holds the stocks in a market index and is an investor in those companies for as long as the companies are included in the benchmark index. An index fund does not have the option of divesting or buying more or less of a stock than is represented in the index, regardless of our own views of the strength of a company’s corporate governance practices. We view this as an opportunity, not a limitation, as we believe in the power of active engagement. We promote and safeguard value for index fund investors by engaging with company boards and leaders to share our perspectives on good governance practices. And when necessary, we use our vote to hold boards accountable for failures of risk oversight, or to encourage the adoption of shareholder proposals that we believe are in the best long-term interests of shareholders.
We approach our engagements as ongoing conversations with companies over months and years. Our portfolio companies know we are not focused on the next quarter or year, but on long-term shareholder value that spans years and decades.
In an actively managed fund, where a portfolio manager can buy or sell stocks in pursuit of outperforming a benchmark index, the investment stewardship levers of voting and engagement serve as additional ways for the manager to express perspectives to a company on behalf of fund investors.1
1 Investment stewardship for Vanguard’s externally managed active funds is carried out by those funds’ investment advisors, who integrate their stewardship principles with their investment processes.
Galloway: We saw continued focus on how companies are responding to climate change risk. Particularly in Europe and the U.K., but also in the U.S., these concerns took on some new flavors, such as companies adopting or receiving “Say on Climate” proposals that encourage companies to disclose climate-related risks, targets, and transition plans.
Heightened attention to risks associated with diversity, equity, and inclusion, or DEI, was another key trend. Investors continue to focus on how companies are ensuring that their board, management teams, and workforce reflect appropriate levels of diversity. We see more companies providing enhanced disclosures of their workforce diversity statistics, their strategy to address DEI-related risks, and progress on their efforts. Calls for third-party racial equity audits, or social justice audits, also gained prominence on the ballots of U.S. public companies during 2021, and we see that trend continuing in the early 2022 proxy season.
One last trend I’ll highlight is the continued focus on company corporate political activity disclosures to help investors identify any risk of misalignment between a company’s stated long-term strategy and its lobbying activities.
Learn more about Vanguard Investment Stewardship, its global corporate governance principles, and its perspectives.
John Galloway is global head of Vanguard’s Investment Stewardship program, which applies oversight to the Vanguard funds’ portfolio companies through engagement, advocacy for good governance practices, and proxy voting. Before joining Vanguard in 2017, John served in several senior roles in the White House and the federal Office of Management and Budget, including as special assistant to the president and chief of staff of the National Economic Council. Earlier in his career, he was president of Atlantic Media and held several senior executive positions with the Advisory Board Company. He earned his undergraduate degree from Georgetown University.
Notes: All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.