Vanguard announced the publishing of its Investment Stewardship 2020 Annual Report.  The report shares the highlights of the asset manager’s engagements with its portfolio companies, observations and voting statistics relating to the 12-month period ended June 30, 2020. The firm’s key focus areas are primarily climate change and diversity.

Vanguard believes environmental, social and governmental (ESG) matters came into sharper focus during the 2020 proxy season because of certain events and circumstances, including the COVID-19 pandemic, economic uncertainty, escalating climate risks and historic social justice movements. Vanguard wants to know how boards plan to preserve long-term relevance.

Engagement Data. Globally, shareholder engagements decreased 8.6% (793 in 2020 proxy season versus 868 in 2019 proxy season) and decreased in the United States by 17% (517 in 2020 proxy season versus 623 in 2019 proxy season). Worldwide, compensation and board composition were discussion topics 47% and 70% of the time, respectively. Independent directors were present at nearly half (46%) of the engagements on a global basis. One-third (33%) of all the companies Vanguard engaged with were carbon-intensive industries. The report does not provide a breakdown of these percentages solely for U.S. companies.

Voting Data. Globally, Vanguard voted on 168,305 proposals at over 18,476 portfolio company meetings, compared with 30,344 votes cast at 3,727 meetings for companies in the United States. Vanguard voted against 384 directors because of executive compensation concerns in the 2020 proxy season.

In the United States, Vanguard was fairly supportive of management proposals: director elections (94%), executive compensation (94%), shareholder rights–governance related (89%), capitalization (92%), and mergers and acquisitions (100%).

Board and Workforce Diversity. Diversity remained a key engagement topic in the 2020 proxy season. The report observes that during the season, public awareness rose around racial and social justice matters. John Galloway, the new Global Head of Investment Stewardship and Glenn Booraem’s immediate successor, remarks, “We will continue to push for progress—and our expectations will evolve to reflect a growing focus on the importance of diversity across boards, leadership teams, and the broader workforce.” Boards should understand how social matters, such as diversity, equity and inclusion, impact customers, employees and the communities in which their companies operate. As human capital management continues growing in importance, Vanguard predicts there will be a rise in shareholder proposals in the upcoming year relating to board and workforce diversity.

With regard to board diversity, Vanguard reiterates the firm’s expectations previously shared in the Investment Stewardship 2019 Annual Report. A public company is expected to:

  • Publish the company’s perspectives on board diversity;
  • Enhance disclosure of board diversity on measures such as gender, age, race, ethnicity and national origin, at least on an aggregate basis;
  • Broaden director candidate searches beyond traditional candidate pools; and
  • Make significant progress across multiple dimensions and prioritize adding diverse voices over the next few years.

Climate. “Vanguard cares deeply about the impact of climate risk . . .,” Galloway states in the report. Vanguard expects every company (regardless of whether it is a carbon producer or consumer) to understand the impact of climate risk on the company and on climate change. A company must have effective board oversight and provide clear and effective disclosure on the board’s decision-making process. Boards at companies where climate is a material risk should be able to demonstrate competency on climate-related matters and take appropriate mitigating action against the risks.

Vanguard supports companies’ using investor-oriented frameworks, such as the recommendations of the Task Force on Climate-related Financial Disclosures, or TCFD. For companies where climate change poses a material risk, Vanguard encourages these companies to set and disclose targets that align with Paris Agreement goals.

Other Topics. Engagements topics included matters such as board identification and oversight of material risks, linking executive compensation to performance, appropriate executive compensation incentives, and political contributions and policies.

Going Forward. While focusing on the long-term and good governance will remain paramount, Vanguard envisions needing to adapt its stewardship program and engagements in response to an uncertain global environment. The report states that Vanguard plans to provide greater clarity regarding its stewardship activities.