For decades, Vanguard Group appeared to exercise its voting rights, in companies where it holds shares, as a monolith.
No longer. The mutual funds giant last week announced its most interesting shareholder voting development in years, spelling out how and why it votes on corporate governance, compensation, strategy, and other proxy matters at public companies.
As of the end of 2019, Vanguard’s 25 external managers will have full voting power over shares in the mutual funds they manage.
Wellington Management, for instance, the outside money manager that manages mutual funds for Vanguard, can now make independent voting decisions and engage with management of the companies in which it holds shares instead of referring back to the Malvern mother ship for direction.
In effect, the external managers who manage $471 billion worth of stocks in American corporations will soon have a say in matters like executive compensation, mergers and acquisitions, and electing directors at those companies. The decision-making power could extend to controversial topics like corporate accountability and climate change.
Still, that $471 billion represents a bit less than 10 percent of Vanguard’s $5 trillion in total assets.
Second, Vanguard disclosed in its fascinating 16-page piece that the company does not “vote in lockstep” with recommendations from proxy advisers, such as Institutional Shareholder Services (ISS) or Glass Lewis, for voting on behalf of the Vanguard funds.
“Data from proxy advisers serve as one of many inputs into our research process. Even when a fund’s vote happens to be consistent with a proxy adviser’s recommendation, that decision is made independently. In the 2018 proxy voting year, for example, Vanguard funds voted differently from ISS on 7% of ISS’s ‘for’ recommendations and 9% of its ‘against’ recommendations," the Malvern-based fund giant wrote.
Vanguard’s disclosure is worth reading on your own, and is available at this website.
Crucially, Vanguard is often the largest — or one of the top 10 — shareholder in public companies, usually joined by BlackRock, Fidelity, and State Street.
In 2018, institutional investors including mutual funds collectively held 70 percent of public company shares in the United States and voted 91 percent of the shares they held. Individual investors who directly held stocks accounted for the remaining 30 percent of share ownership, yet they voted only 28 percent of the shares they held, according to Vanguard.
During the proxy year ended June 30, 2018, Vanguard funds cast proxy votes on 168,786 individual ballot items. Although environmental and social proposals get a lot of attention, “director elections, capitalization matters, and executive compensation issues accounted for the majority of our voting activity,” the company said.
Next month, oil giant ExxonMobil is expected to hold yet another proxy vote on climate change. Vanguard voted for a related resolution last year, as did BlackRock.
What’s surprising about Vanguard’s shift?
“I was surprised, given the fact they’ve been refusing to talk about things like corporate political donations,” said Bruce Freed, president of the Center for Political Accountability in Washington, which tracks political giving by S&P 500 companies.
As Vanguard founder John Bogle outlined in the Wall Street Journal last year, U.S. index mutual funds own more than 17 percent of the American stock market’s value — up from 4.5 percent in 2002.
It’s unclear if Vanguard is changing its proxy voting in order to outsource votes on controversial issues or to keep pace with investors’ demands for more accountability at public companies.
Vanguard’s decision “aligns the interests of shareholders more closely. Active fund managers are more informed about what’s going on at the company level. They can buy or sell the stock at any time, whereas an index fund can’t,” said Michael Pagano, professor of finance at Villanova School of Business.
“The active managers can now take a public stance on controversial issues,” he said.
Jeff Perkins, executive director at Friends Fiduciary, which manages $470 million for Quaker institutions nationally, said he views Vanguard’s news as “positive, but this is not even 10 percent of their assets. For us, this is really important when it comes to environmental shareholder proposals. Vanguard does not have a stellar record in terms of proxy voting surrounding that issue,” he said.
Still, it’s a sign that change is afoot: In 2018, Vanguard supported 12 percent of climate change shareholder proposals, vs. none in 2014, said Perkins.
Finally, Vanguard and the other “Big Three” asset managers may have found support for more corporate transparency in an unlikely place.
An influential jurist, Delaware Supreme Court Chief Justice Leo Strine, wrote last year about the reluctance of institutional shareholders to vote for political spending proposals. Strine is an adjunct professor at the University of Pennsylvania law school.
“Unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run,” he wrote in a research paper. Strine dubbed corporate political spending a “fiduciary blind spot: They let corporate management spend the worker investors’ entrusted capital for political purposes without constraint."