Vanguard's Thinking on Corporate Governance

As both one of the largest sponsors of active and index mutual funds, Vanguard represents significant voting power for corporate proposals on management compensation and election of directors.

Glenn Booraem, Controller of the Vanguard Funds, recently posted a note on the Vanguard site, in which he writes,

"However, by its nature, voting reduces often complex issues to a binary choice—between FOR and AGAINST a particular proposal—making the proxy vote a rather blunt instrument. This is where the second—and perhaps more important—component of our governance program takes over; engagement with directors and management of the companies in which we invest provides for a level of nuance and precision that voting, in and of itself, lacks. So while voting is visible, it tells only part of the story.

We believe that engagement is where the action is. We have found through hundreds of direct discussions every year that we are frequently able to accomplish as much—or more—through dialogue as we are through voting. Importantly, through engagement, we are able to put issues on the table for discussion that aren't on the proxy ballot."

The governance industry, which now generates careers, robust fees and conflicts of interest, loves using blunt instruments, such as voting as a litmus test for shareholder engagement.  On the other hand, corporate managements often put out proposals without any regard for how they would play with their shareholders.

The truth is that institutional shareholders for many decades have been lazy, inattentive owners.  Their measure was to focus on price changes relative to an index; unanticipated, dismal performance would wake them from their slumber.  Proxy votes, as I experienced from several sides of the capital markets, were left to attorneys to check the boxes FOR, unless otherwise instructed.

An ongoing, deeper constructive engagement with corporate managements should yield better use of corporate assets which should lead to better performance with fewer surprises, which is what investors really want.