An interview with John Galloway, principal and global head of investment stewardship, Vanguard.

Vanguard Group was founded in 1975 in Pennsylvania and is the second-largest fund manager in the world, representing $7.2 trillion in assets.

In your mind, what were the key trends in the 2022 proxy season?

The main trend we observed was the growth of shareholder proposal filings in the U.S., with the volume of environmental and social proposals subject to a vote nearly doubling. This increase was thanks in part to the Securities and Exchange Commission’s (SEC) amendments to its no-action letter guidance, mandating that certain proposals would no longer be eligible for exclusion.

Vanguard funds do not seek to dictate company strategy or operations, nor do we look to use the fund’s votes to address any issue besides shareholder value creation. With the increase in shareholder proposal volumes in the U.S., we have some concerns about companies receiving proposals that are duplicative or otherwise a distraction from the company doing the work that its board and management team believes will drive shareholder value.

In Europe, we saw a continued focus on executive remuneration, with boards exercising a cautious approach to quantum in the context of the cost-of-living crisis, as well as effectively recruiting and retaining talent. This is an area we continue to engage with companies on, to understand how they are balancing their need to recruit and retain executives with those concerns and considerations.

How has Vanguard’s voting policy evolved, ahead of the 2023 proxy season?

In our evaluation of recent corporate governance practices, we did not see the need to make any material changes for 2023 to the policies that our internally managed equity funds follow. That said, there are some refinements we’ve made that are worth mentioning.

Recent policy changes help explain to portfolio companies and our investors how the funds might vote in instances where we do have a concern about a governance failure. For example, if there was a lack of independence on a board or an egregious pay package, one of the changes we have made is that we might vote against all members of the relevant committee, as opposed to one specific individual on the committee.

In Europe, we also clarified how we evaluate director capacity, making clear we want companies to help us understand the scope and complexity of directors’ external commitments. This is so that, when we do our case-by-case analysis, we have a full understanding of the company’s perspective on director capacity.

We’ve also added some clarifications on how we analyze management “say on climate” proposals, focusing on the board’s role in overseeing corporate climate disclosures. We are focused on how the board is governing that process and how it’s disclosing the related risks and its strategy to investors.

Do you expect to see a continued high number of ESG proposals hit proxy ballots this year?

While I don’t have a crystal ball, I think we will continue to see a relatively large volume of shareholder proposals. We’re not involved until we see these items on the ballot but, from what we have heard from portfolio companies, issuers are expecting a continued high volume of proposals.

Notably, companies are anticipating more proposals from what I’d describe as “one-issue advocates” or proponents who remain focused on one particular issue. In some cases, these proponents put forward proposals that may be less directly associated with shareholder value at the company in question and more focused on a broader societal or policy issue. We will assess each of these proposals in the context of the company that receives it but, as I mentioned, the Vanguard internally managed equity funds are less likely to support a proposal that we view as being overly prescriptive, dictating a company’s strategy or operations, or not associated with financially material issues.

How might the SEC’s ‘Pay versus Performance’ disclosure requirements impact investor voting on executive pay?

We’re really interested to see this first round of disclosures, particularly reporting on how companies have performed relative to industry peers. Peer-aligned performance has always been a key factor in our decision-making process when it comes to remuneration.

We’re encouraging companies to articulate how they’re incentivizing their leadership team to create long-term value for shareholders. We don’t believe that compensation is a one-size-fits-all approach, as each compensation plan and the mechanisms through which it’s delivered are different. Each mechanism also has different levels of importance and relevance for different companies, based on their industry, strategy, and based on where they are in the execution of their corporate strategy.

If you could introduce one corporate governance reform, whether it be in the U.S. or internationally, what would it be?

Ensuring consistency of information and disclosure, both in terms of substance and format on key governance issues.

Consistent and comparable disclosure allows us and other investors to both understand and potentially identify any areas where we might have concerns about a company’s corporate governance profile. It also allows the market to efficiently price the securities of each company based on a full understanding of their governance practices and any risks to shareholder value.

In certain markets outside the U.S., we often find that there’s an asymmetry of information that makes it hard to compare companies like-to-like and to understand exactly where there may be governance practices that might cause concern. We are hopeful that there will be a move toward the adoption of standards that are consistent across markets to help boards identify and disclose risks and opportunities in a way that’s consistent with long-term shareholder value creation.