Vanguard recently announced updates to its proxy voting guidelines. The updated policy guidelines become effective as of March 1, 2022. The most significant policy updates relate to the issues of board commitments, board diversity and qualifications disclosure, and environmental/social shareholder proposals. The policy updates are summarized below.
Director capacity and commitments
In its updates, Vanguard has clarified that under its director overboarding policy, the limit of two public boards applies to all Named Executive Officers (NEOs), including the CEO. Previously, the policy stated that Vanguard would vote against an NEO director who sits on more than one outside public board without explicitly specifying the two-board limit. Vanguard has explained the rationale behind its update by noting that because most CEOs sit on their “home boards,” functionally this refinement to their policy results in no change in its approach. However, for other NEOs, because most do not sit on their US company home boards, the limit will be most applicable in circumstances where the executive sits on two external-company boards. Vanguard’s policy to limit non-NEO director to a total of five public boards remains unchanged.
Vanguard’s current guidelines also indicate that in certain instances, based on a company’s facts and circumstances, it might vote for vote for a director who would otherwise be considered overboarded.
In the update, Vanguard has added that it would look for companies to adopt good governance practices regarding director commitments, including a formal overboarding policy and disclosure of the board’s oversight of the implementation of that policy.
Escalation process: Director and committee accountability
In its policy updates, Vanguard has specified that it generally will not apply an accountability vote against a director who has served less than one year on the board and/or applicable committee, but may apply it to another relevant director in their place.
Diversity and qualifications disclosure
If, in Vanguard’s view, a portfolio company’s board is making insufficient progress in its diversity composition and/or board diversity-related disclosure, Vanguard has changed its policy language from voting generally on a case-by-case basis to generally voting against a director in such an instance. In order to evaluate sufficient progress, Vanguard’s guidelines have been clarified to provide that a board should, at a minimum, represent diversity of personal characteristics, inclusive of diversity in gender, race, and ethnicity on the board, in addition to diversity of tenure, skills and experience. Also, a board should take action to have its composition reflect the geography of the company’s markets and long-term strategic needs, as well as demonstrate how it intends to continue making progress to increase diversity across different dimensions.
Vanguard notes that boards can inform shareholders of the board’s current composition and related strategy by disclosing at a minimum the following:
- statements from the nominating committee (or other relevant directors) on the board’s intended composition strategy, including expectations for year-over-year progress
- policies related to promoting progress toward increased board diversity
- current attributes of the board’s composition
Vanguard has provided information on its expectations relating to disclosure of directors’ diversity, demographics and qualifications. Vanguard requires boards to disclose directors’ personal characteristics (such as self-identified race and ethnicity) on a self-identified basis. The company can present the data on an aggregate level or individual director level. It expects disclosure of skills and experience to be at the director level. For diversity disclosure, the board should at least include the genders, races, ethnicities, tenures, skills, and experience that are represented on the board.
Vanguard’s existing policy provides voting against responsible directors when, in Vanguard’s view, they have failed to oversee effectively material risks that include environmental and social risks. As amended, Vanguard’s updated guidelines add an explicit reference to climate risk and its assessment to the board’s oversight duties. To assess climate risk oversight failure, Vanguard will consider the following criteria:
- materiality of the risk;
- effectiveness of the disclosure to understand and price the risk;
- disclosure of company’s business strategies including risk mitigation plans in the context of regulatory requirements and market agreements; and
- company- specific context, market regulations, and expectations.
Additionally, Vanguard will consider the board’s overall governance of and effective independent oversight of climate risk.
Vanguard has changed its previous policy to vote against proposals to conduct “virtual-only” meetings. Going forward, it will generally support such proposals as long as shareholder rights are not curtailed. It will consider supporting the proposal if:
- meeting procedures and requirements are disclosed in advance of a meeting;
- a formal process is in place to allow shareholders to submit questions to the board;
- real-time video footage is available and attendees can call into the meeting or send a recorded message; and
- shareholder rights are not unreasonably curtailed.
Key committee independence
Under its existing policy, Vanguard may, if a company’s board committees are comprised of a majority of non-independent directors for two years or more, vote against the board’s entire nominating committee. In cases where a board has no nominating and governance committee and instead acts as its own nominating committee, Vanguard has clarified its policy language to provide that it will generally also vote against all directors, except where only the board’s independent directors nominate directors and/or make the final appointment decision.
Vanguard has also clarified its policy language to specify that for a controlled company’s compensation committee and nominating and governance committee, it will generally support a non-independent director on that committee as long as the non-independence is not due to being an employee or former employee (within the past 3 years) of the company or affiliation with the controlling shareholder (if the CEO is a party to the controlling shareholder) and the relevant committee is majority independent.
Vanguard has expanded its discussion of environment and social proposals to provide more specific guidance based on the types of proposals.
Vanguard will take a case-by-case basis approach on disclosure-related management and shareholder proposals based on environmental and social risks to a company.
Targets, policies, and practices proposals
Vanguard will vote case-by-case on management and shareholder proposals that request adoption of specific targets or goals and on proposals that prescribe adoption of environmental or social policies and practices. Vanguard states that its funds are unlikely to support shareholders proposals that are more prescriptive in nature; by contrast, proposals that request a company to set goals to achieve its key strategic targets are more likely to receive its support.
Vanguard’s existing guidelines specify that it is likely to support a proposal if it meets Vanguard’s criteria - addresses a gap in company’s disclosure relative to market norms or widely accepted frameworks supported by Vanguard; reflects an industry-specific, materiality-driven approach; and is not overly prescriptive.
In its policy updates, Vanguard expanded its list to specify the following non-exhaustive examples of proposals that it is likely to support, subject to meeting the above criteria:
Specific to environmental proposals
- Request for disclosure related to companies’ Scope 1 and Scope 2 emissions data, and Scope 3 where climate-related risks are material
- Assessment of the climate’s impact on the company, disclosing appropriate scenario analysis and related impacts on strategic planning
- Goals or target-setting for relevant greenhouse gas emissions
Social risk proposals
- Request for disclosure on workforce demographics inclusive of gender and racial and ethnic categories, including publishing EEO-1 reports
- Request for disclosure on board’s oversight of material diversity, equity, and inclusion (DEI) risks or other material risks Requests for adoption of targets or goals related to board diversity
- Request for inclusion of sexual orientation, gender identity, minority status, or protected classes in a company’s employment and diversity policies (proposals asking for exclusion of such references will not be supported)
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