A conversation with Vanguard's Glenn Booraem
What is top of mind for institutional investors in the 2017 proxy season? I recently sat down with Glenn Booraem, the head of Investment Stewardship for the Vanguard funds, to find out. We talked about where Vanguard is focused this year, how companies should think about shareholder engagement, and whether institutional investors are becoming independent advocates for social change.
We are in the middle of proxy season right now, so I’m sure your calendar is busy with company outreach. Can you tell me about Vanguard’s priorities for this year?
Glenn Booraem: At the top of the list for Vanguard is always going to be the role and the effectiveness of the board. For a long time, we and others focused on structural components of governance – things like classified boards, proxy access, and majority voting. But what really matters at the end of the day are the people in the boardroom serving on our behalf. While the structural items are still important, focusing on board composition first reduces the likelihood that we’ll need to use these other measures. Nonetheless, we’ll continue to engage where we see these structural gaps. While most larger companies have adopted these governance structures already, there are opportunities to promote their adoption among mid- and smaller-cap firms.
We want to ensure boards have solid processes for ensuring an appropriate degree of diversity – of thought, gender, experience, and ethnicity, among other dimensions – in the boardroom to facilitate better decision-making and oversight.
With respect to the board though, we are increasingly focused on developing an understanding of how boards ensure their effectiveness, and think about board succession. The board, absent some form of shareholder intervention, is a self-perpetuating body. It’s therefore important that we understand how the board aligns the capabilities of the directors with the company’s strategy, the evolution of the markets, and the trajectory of the firm. We also want to ensure boards have solid processes for ensuring an appropriate degree of diversity – of thought, gender, experience, and ethnicity, among other dimensions – in the boardroom to facilitate better decision-making and oversight. Other matters, such as executive compensation and oversight of risk and strategy, really stem from having the right people working on shareholders’ behalf.
On the issue of shareholder engagement, you estimate that about 25-30% of your company meetings include a director. While most of the larger companies seem to be willing to have their directors involved in those conversations, many smaller companies seem to be more reluctant. What would you say to those companies who haven’t yet come around to the idea that shareholder engagement is part of the role of a director?
GB: For companies who just don’t want their directors engaging, I would ask: If the directors don’t talk to the owners they serve and represent—then who does? We prioritize matters for engagement with the board, acknowledging that not every matter is necessary or appropriate for a board discussion. But the board has exclusive purview over many important matters – executive compensation and succession planning, among others – and it must be willing to have effective communication with company owners. For a board to close itself off from its primary constituency is just a miss.
When we have the opportunity to talk with directors, it’s almost always a mutually beneficial conversation. We gain perspective, and they get unfiltered input from a significant, long-term owner.
In some cases, the hurdle to engagement is not the board, but management. I recall a time when we wanted to speak with the chair of the compensation committee at two different companies – and it happened to be the same person who served as the compensation committee chair on both boards. We reached out to both companies to set up meetings. At Company A, they had her on the phone with us later that same week. At Company B, it took almost two months to set up the meeting. It wasn’t an issue of the director’s availability – we knew she was available and willing to meet. It seemed as if it was a question of the company’s willingness to put her in front of us.
There is a role for the CEO and management in the shareholder engagement process, but if the CEO is concerned about members of his or her board talking to their shareholders, that raises bigger questions.
Do you think investors are taking a different role when it comes to the social issues than they have in years past? Recent open letters from Blackrock and State Street seem to be emphasizing companies’ role in promoting social and political issues – climate change, income inequality, health care, immigration policy, etc. Do you see a shift here?
GB: I believe that, like Vanguard, other investors are also focused on long-term results. There are issues on the investment side that have a social angle, like the ones you mentioned, but they are being tackled, at least in our case, from the economic perspective.
Our position comes solely from our status as an equity owner in companies. Our singular goal is to maximize the value of our clients’ investments over the long term. While there are social components to an issue like climate change, there are also economic components.
We are focused on the economic components, not the ideology, though it’s often the case that what’s good for one is good for the other. For example, in our engagements we want to see that companies exposed to various outcomes of climate risk appropriately value and mitigate those risks where they can. You could also argue that board diversity is a social issue, but the research shows that it is also an economic issue - diversity positively impacts long-term performance. That’s what gets our attention.
At the end of the day we are investors, and we don’t believe investors are best positioned to be agents of change on social issues. More than 20 million people invest in Vanguard funds, and we recognize that they likely have a very wide range of deeply held beliefs. We could not fulfill our obligation to give all of our investors the best possible outcomes if we used our ownership position to advance an ideological outcome not connected to a long-term value case.
Glenn reinforces what we have been hearing again and again from institutional investors – that shareholder engagement should be considered a key component of a board’s duties. If your board has not been having regular discussions, start thinking about putting an engagement plan in place – after your annual meeting is over. If your board is already doing off-cycle engagement, make sure that the directors involved are well-prepared and ready to dive into the issues.
