Why Vanguard Is Pushing Stewardship

John Hale: Hi, I'm John Hale, director of sustainable investing research at Morningstar. I'm here at the Morningstar ETF Conference with Glenn Booraem, investment stewardship officer at the Vanguard Group.

Glenn, thank you for being with us today.

Glenn Booraem: Thanks for having me.

Hale: So, Vanguard is the largest fund company in the U.S. Most of those assets passively managed. It seems to have become more active in the engagement of companies it owns. Why is that?

Booraem: I think, despite the fact that we're passive on the investment side, or we're indexed on the investment side, we're very active on the stewardship side, because we think that companies that are governed well, will perform better over the long term. And ultimately, that's what our investors are looking for. They're looking for performance over the long term, and we believe that by advocating for good governance, we think we can enhance long-term investment outcomes for our shareholders.

Hale: Traditional argument might be that sort of because passive investors can't divest of stock, that perhaps management doesn't pay as close of attention to their passive investors, or shareholders, but you've sort of turned that on it's head.

Booraem: I think companies are increasingly paying heed to what they're hearing from their largest investors, regardless of their style. Our ability to influence direction on things like board composition and compensation design and oversight of risk, is a really important part of our advocacy on behalf of our fund investors.

Hale: Among other issues, you've been emphasizing gender diversity on boards, and climate risk disclosure this year. Kind of connect the dots for us on how those kinds of issues might impact long-term shareholder value.

Booraem: I think just stepping back for a second, there are four really key tenets we think are important from a governing standpoint. The board, first and foremost--the board is really first among equals in the list of things that we think are important from a governing standpoint. And gender diversity falls squarely under the board pillar of our approach to governance. There's compelling research that shows that boards and other deliberative bodies that have some critical mass of women make better decisions, create better shareholder value, over the long term.

The hook there for us, is economic. We think that boards that have a critical mass of women, will make better, more fully considered decisions over time, that accrue to the benefits of long-term share owners, like us.

You know, the other things we think are important from a governing standpoint are governance structure, so that there's an appropriate ability for shareholders to affect change over time. We think compensation is really important, we want compensation to be linked to relevant performance, over the long term.

And then oversight of risk is really important to us. And that's really where disclosure of climate risk comes in. We think that to the extent that the market understands the risks of all sorts that companies are subject to, the better able the market is, and other investors will be, to value those risks and assign appropriate stock prices over time. And as, particularly on the index side, where we're not actively trading, we're price-takers in many instances, ensuring that the market reflects the best value, or the appropriate value at all points in time, reflecting all relevant risks, is an important part of how we think value is maximized.

Hale: This year, Vanguard voted for a shareholder resolution on climate risk disclosure at Exxon Mobile, and that garnered something like 62% of shareholder votes. Couple of questions related to that: Is Exxon going to disclose this year, do you know anything about that?

Booraem: I don't.

Hale: What's the next step, if they don't? Then just more broadly, there were other climate risk disclosure resolutions at other companies, and why vote for some and not others?

Booraem: I think generally speaking, we're going to support proposals in those places where we think both the level of current disclosure, and the level of responsiveness of the board and the company over time, needs an additional push. And so without commenting specifically on any particular company, the places we're going to support shareholder proposals on this topic and others, are places where we think that the current state of play needs to move forward, and where the company and the board haven't articulated a plan to get where we think they should.

So I think, regardless of the company, in the wake of approval of a shareholder proposal, what we expect is for the board, and the company to undertake an evaluation of the messages they've heard, both implicitly and explicitly through their dialogue with shareholders, and reflect that going forward. And we'll continue to evaluate ... our engagement with companies through both direct discussion and voting, is an ongoing process. It's not transactional, it's not an event, it's a process.

Dontinuing to engage with companies where we think there's more progress to be made, is part of, you know, that's what we do. So the dialogue will continue on this and many other issues.

Hale: It seems like this year's proxy votes and your more, sort of, public discussion of them, indicates a new kind of willingness to use proxy voting as maybe a more integral part of the process. Is that true?

Booraem: Yeah, I think one of the main things that's changed for us is the degree to which we've communicated broadly our process and our outcomes. We've engaged on climate and other risks for the last several years with an increasing number of companies. Last year we engaged 950-odd times with portfolio companies representing, at least in the U.S., about half of our equity AUM.

We have a long-standing track record of engaging with companies on voting, escalating our engagement through voting over time. I think one of the primary things that's changed this year is the extent to which and the depth with which we've communicated that to the market and to shareholders. And we think that's an important part of the evolution of our process, and our sharing of perspectives with our shareholders, indicating the things we're doing on their behalf.

Hale: Very interesting. Glenn Booraem, thank you for being with us today.

Booraem: Thanks.

Hale: At the Morningstar ETF Conference, I'm John Hale.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.