Recent actions at Vanguard point to the increasing scrutiny within the investor community regarding the topics on which companies are expected to report – and act.
In its annual investment stewardship report, Vanguard cites its four pillars for companies’ long-term investment success:
- high-performing boards that are fit for purpose
- governance structures that empower shareholders
- compensation plans that appropriately incentivize sustained outperformance
- a framework for overseeing and managing significant risks
Within those pillars are indications of the areas in which Vanguard is becoming more active. On boards, for example, “Diversity such as gender, race and age” are among the criteria (in addition to experience, independence and relevant skills).
Spotlight on Risk
Under risk, the focus is on identifying and communicating the company’s approach to risks, including potential risks most relevant and material in the context of industry and region shareholder value over the long term.
Among the risks about which Vanguard is clearly interested in knowing more is climate change. Its proxy voting report underlines its determination to intercede on topics like climate change disclosure and board gender diversity to protect shareholders’ interests. For Vanguard, it isn’t a question of “being inherently good or noble” but rather of the impact on long-term economic value.
In an accompanying letter to directors of public companies worldwide, Vanguard CEO Bill McNabb calls climate risk “an example of a slowly developing and highly uncertain risk—the kind that tests the strength of a board’s oversight and risk governance.”
The report also highlights Vanguard’s increased engagement and its willingness to vote against companies it deems insufficiently responsive. Its commentary on its vote against a Canadian materials company is direct: “The engagement revealed that the company understood neither the value of gender diversity nor the importance of being responsive to shareholders’ concerns.”
Vanguard’s message comes after pressure from its investors to take a more active role. In its communications, the fund company frames its heightened efforts and expanded reporting on its focus areas as planned evolution. Whatever the origin, McNabb assures his audience of corporate boards, “Our four pillars and our increased focus on climate risk and gender diversity are not fleeting priorities.”
The message: take a good look at your disclosure to make sure you’re sufficiently reporting these topics. Your investors are watching.