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Vanguard Tackled Bad Governance During the 2018 Proxy Season

The firm has increased the number of companies it engages with and ramped up efforts with companies it said have “governance failings.”

  • By Alicia McElhaney

Indexing giant Vanguard is becoming increasingly active in engaging with companies during proxy season — and said it has seen “no shortage” of corporate governance failings so far in 2018.

“Numerous companies faced controversies ranging from cybersecurity breaches to unfair systemic business practices,” said Glenn Booraem, Vanguard’s  investment stewardship officer, in the company’s Investment Stewardship Annual Report, published on its website on Thursday. The report details how Vanguard engaged with the companies it invests in during 2018.

Vanguard is among a number of passive investors using its increasingly large pool of assets to engage with the companies it is invested in during proxy season. According to Vanguard, during 2018 the firm engaged with 721 companies, which was a 63 percent increase from 2014.

In this year’s stewardship report, Vanguard focused on four key issues: board diversity, executive compensation, risk and strategy (including sustainability), and governance structures. 

In previous years, Vanguard has made it clear that environmental, social, and governance issues are of interest when it comes to proxy engagement. However, the firm expanded its reach in 2018, focusing on what it views as governance failings, like data breaches or federal investigations. 

Vanguard detailed in the report one instance in which it worked with a U.S. industrials company following a data breach.

“The company was receptive to our feedback, acknowledged past missteps, and communicated a detailed plan,” according to Vanguard’s report. The company created a special independent committee to investigate and engaged a number of outside experts to help it fix the issue. 

Vanguard noted that when board re-election time came along for this particular company, it voted to keep the entire board, given its proactive approach to the data breach. 

When a company is faced with a crisis, “we want to see the board actively engaged in ongoing communications with shareholders as the situation unfolds,” said Brian Denney, a senior strategist at Vanguard, in the report. He added that Vanguard wants to know when and how the company's board is responding to a crisis, in addition to learning what gaps have been identified internally that allowed a crisis to happen. 

According to Denney, it’s important for companies engulfed in crises to respond in a “timely” and “transparent” manner. 

[II Deep Dive: Asset Managers Among the Worst-Governed Public Firms, Study Finds]

Vanguard said it has been focused on engaging healthcare companies and gun manufacturers and distributors during the year, in the hopes of engaging boards on the opioid crisis and gun violence in the United States. 

The firm not only worked with pharmaceutical companies but also drug manufacturers and retailers to learn about how their boards are working to mitigate the opioid crisis. 

“Based on our engagements with company directors, we believe there is an opportunity for some companies to provide more transparency about their oversight of these significant risks,” according to Vanguard. 

The firm also worked with gun manufacturers, holding meetings to discuss risk oversight, in addition to how each company plans to remain relevant in the long term. 

“As in our engagement in other industries, our objective is not to change what business a company is in or what product it produces, but rather to ensure that the risks of these choices are understood by the market and reflected in the company’s long-term value to investors,” according to Vanguard. 

During the past year, the firm said it has engaged companies that account for $1.62 trillion of its assets under management. That translates to roughly 47 percent of the firm’s equities, according to its report.

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