Vanguard’s proxy votes - for and against - are now more transparent than ever

Vanguard is flexing its muscles and naming names.

In its latest Investor Stewardship Report, Vanguard disclosed new details about how and why it voted during the last year’s proxy season — more so than at any time in the Malvern-based giant’s history, outside experts said.

Vanguard released a full list of its votes — both “for” and “against" — on issues before hundreds of public companies. The firm, which votes the mutual fund shares of its customers, focused on such issues as executive compensation, fighting climate change, and diversifying the racial and gender composition of company boards and executive ranks.

“We believe shareholders should vote to ensure accountability of a company board,” John Galloway, the newly named head of investment stewardship at Vanguard, said in an interview.

Vanguard often ranks among the top three shareholders of major public companies, so the new openness is significant and refreshing, say corporate governance experts.

“They recognize now that their voice carries tremendous weight,” said Timothy Smith, director of ESG [environmental, social, governance) shareowner engagement with Boston Trust Walden “This latest report is a significant expansion of their past reports. We give them credit for transparency.”

Smith’s firm remains a critic of Vanguard, calling it timid on environmental issues. Vanguard leaders, Smith said, “say they support the Paris Agreement, for example, but their proxy votes don’t reflect that.”

With more than $6 trillion in assets under management, and as the world’s largest mutual-fund provider, Vanguard has immense clout. Its stewardship team held discussions with nearly 800 companies across 27 countries — and cast votes on 168,000 proposals.

Overall, the picture that emerges in the 2020 report is of a company that is most activist on compensation and board constitution issues, less so on environmental ones.

Still, Galloway says, diversity, equity and inclusion are “key drivers to long-term value" for companies. "We want boards to understand the risks of getting it wrong,” he added.

Vanguard named Galloway head of its global investment stewardship unit on Tuesday, the same day it released the annual report on its votes. He previously worked in client experience after joining the Chester County firm in 2017. Before that, Galloway served on the White House staff of President Barack Obama and in the the federal Office of Management and Budget.

Vanguard voted its mutual funds' shares against the pay package for Alphabet executives, including new CEO Sundar Pichai, and for the first time named the company as one of many case studies in its annual report. The corporate parent of search engine Google paid Pichai’s stock awards valued at $276 million for 2019.

Vanguard “found a misalignment between pay and performance” and wanted long-term compensation tied to metrics such as relative total shareholder return. Nonetheless, Vanguard and other shareholders ended up on the losing side of the vote.

At Uber, however, Vanguard voted in favor of the $45 million pay package for CEO Dara Khosrowshahi — although under protest, and said it would be watching the board’s actions closely.

“We echoed other shareholders' concerns that the CEO’s significant retention award, with a one-year vesting period, was excessive and misaligned with the long-term interests of shareholders," the report said.

Massive stock awards to the chief executive were "not aligned with performance metrics,” Vanguard also said in its report.

While Vanguard voted against the shareholder “Say on Pay proposal” at Uber this year, it warned that “we expect the board to implement appropriate incentives to better align with shareholders' long-term interests.”

Vanguard also opposed Alphabet’s executive pay in prior years. But for the first time this year, Vanguard disclosed its reasoning behind specific proxy votes on issues and risks such as board of director elections, gender and racial pay disparities, social issues and climate change and the perceived risks' effect on profits.

At Boeing, Vanguard split its vote on two shareholder proposals: It voted against a management proposal to reelect a director, citing “oversight failure” at the aircraft company. But it voted for an independent board chairman, saying it “will enhance board leadership and benefit shareholders.”

Boeing has been wracked by the deadly failures of its 737 Max aircraft and what critics say has been a troubling culture that prioritized profits over safety. Vanguard voted with the majority on the proposal to have an independent board chairman. The proposal to remove the director failed.

Vanguard cast its votes on climate change proposals on a case-by-case basis, according to Galloway. For example, Vanguard voted for a report on climate change at iA Financial Corp., a large Canadian firm, but against a proposal that it meet specific targets to reduce emissions. Its reasoning: that the company had already pledged to make public goals for controlling emissions.

Vanguard voted in favor of reports on climate change at natural gas firm Ovintiv, United Parcel Service, and J.B. Hunt Transport Services; but against them at JPMorgan Chase and railroad Union Pacific.

For the first time, the report includes detailed case studies about key votes with the involved companies all identified. In the past, Vanguard had spared firms criticism by using pseudonyms.

Galloway said a key reason for including the case studies with names was to broadcast guidance to other public companies. He said Vanguard’s hope was they would take their cues from the detailed examples.

Charles Schwab, Citigroup and GEO Group, an operator of private prisons, all fought off shareholder proposals to disclose political spending and lobbying payments. Vanguard agreed with management and voted against such proposals, according to its report.

Its reasoning: The companies' reporting on lobbying and expenses “meets regulatory requirements; disclosures are in line with industry peers,” and the companies promised progress.

Bruce Freed, head of the Center for Political Accountability in Washington, said Vanguard had erred in not backing more disclosure of corporate money spent on politics.

“Vanguard can vote for more transparency on these other issues, but they continue to oppose disclosing corporate political spending,” Freed said. His view: “Any political spending can create [financial] risk, no matter which candidates companies are supporting.”

But in Galloway’s view, caution is part of Vanguard’s makeup.

“We were thoughtful about our approach to this, and we give [public companies] time to absorb our expectations and react,” he said. "That’s part of the benefit of being a long-term shareholder.

“We’re never going to make every advocate happy,” he added. "That’s not our mission. It’s to look after fiduciary interests of long-term investors.”

The full report and Vanguard’s votes are available at https://about.vanguard.com/investment-stewardship/how-our-funds-voted.