Vanguard’s 2023 proxy voting policy updates

Vanguard recently announced updates to its proxy voting guidelines. The updated policy guidelines become effective as of February 1, 2023. The below policy updates are related to topics including director capacity and commitments, director and committee accountability, diversity and qualifications disclosure, climate disclosure, executive compensation, and mergers, acquisitions, and financial transactions.

Director capacity and commitments

Vanguard has clarified under its existing director overboarding policy, the limit of two public boards applies to all named executive officers (NEOs), including the CEO, for instances which comprise either the NEO’s “home board”, “(i.e., a company where the NEO serves as an executive officer) plus one outside board, or two outside boards if the NEO does not serve on their home board”. Vanguard’s policy to limit non-NEO directors to a total of four public boards remains unchanged.

In the update for 2023, Vanguard has added language to further support its 2022 position for companies to adopt good governance practices regarding director commitments, including a formal overboarding policy and disclosure of the board’s oversight of the implementation of such policy. Vanguard now explicitly identifies helpful disclosure to include a definition of the company’s overboarding policy, “e.g., what limits are in place, and, if a nominee for director exceeds its policy, any considerations and rationale for their nomination”. Also, Vanguard emphasizes that it is a best practice for companies to include disclosure of the process for establishing its policy and the frequency of its review to ensure it remains relevant. Companies should consider providing clear disclosure such as the board’s consideration of the nature of the board commitments and overall board attributes in evaluating an overboarded director situation.

Director and committee accountability

For certain governance concerns, Vanguard will now hold the relevant committee members accountable instead of the committee chair or the board leadership. In its policy updates, Vanguard has replaced former references related to individual director accountability (e.g., board chair, key committee chair, and lead independent director), now applying it to a broader set of board members, including relevant committee members under select circumstances, such as lack of sufficient board independence (nominating committee) and insufficient responsiveness to shareholder concerns, including limitations to shareholder rights (governance committee).

Vanguard has added language to its section “Limiting shareholder rights”, indicating concerns regarding overly onerous advance notice provisions, likely based on a trending number of requested changes to company bylaws. Vanguard may withhold votes against governance committee members if they determine such bylaw changes to be unfriendly to shareholders,  acting as a defense against dissident universal proxy card shareholder nominations.

Vanguard revised their approach to accountability in situations when there are concerns identified regarding egregious pay practices and Say-on-Pay is not up for vote, for which they may withhold against all applicable members of the compensation committee, as opposed to just the compensation committee chair. Vanguard further clarifies, in the absence of any applicable key committee members being up for election, they may elect to withhold against other relevant board members if warranted.

Diversity and qualifications disclosure

For 2023, Vanguard has added language to its section “Lack of board diversity”, in which they clarify the importance of compelling rationale and disclosures being provided by companies, potentially providing an opportunity to remediate concerns in relation to lack of board diversity.

Vanguard has removed previous language and reference to instances for which they likely would support specific board diversity-related shareholder proposals, including the proposals listed below:

• Proposals seeking disclosure of a director’s personal characteristics
• Proposals requesting adoption of diversity-related board policies
• Proposals which are not overly prescriptive pertaining to director-related skills or disclosure

This may be reflective of an evolving policy position for Vanguard to review individual company circumstances and actions more holistically, on a case-by-case basis, aligning with the potential opportunity for companies to provide more robust and relevant disclosures to emphasize steps being taken to improve board diversity.

For the shareholder proposals it is likely to support, Vanguard has added to its list proposals requesting disclosure of the company’s approach to board composition, inclusive of board diversity. The addition under the section “Specific to social risk proposals” indicates Vanguard’s preference for companies to provide an enhanced level of disclosure when summarizing an approach to board composition and how board diversity is factored into a company’s process. 

Climate disclosure

In the update for 2023, Vanguard removed explicit reference to certain shareholder proposals it is likely to support. Vanguard has revised language within its section “Targets, policies, and practices proposals”, replacing the term "prescribe" with "request" and has removed reference to likely supporting “Other proposals, such as requests for the company to set goals that further articulate the path to implementing a disclosed company priority”. Further, Vanguard has removed language within its section “Specific to environmental proposals”, that previously stated its likelihood to support “Goals or target-setting for relevant greenhouse gas emissions”.

Similar to Vanguard’s positioning regarding board diversity, these revisions may be reflective of an evolving policy position for Vanguard to review circumstances and actions of companies more holistically, on a case-by-case basis, aligning with the potential opportunity for companies to provide more robust and relevant climate-related disclosures to emphasize steps being taken to appropriately manage risks which are deemed material to a company’s strategy and operations.

Executive compensation

Vanguard has made revisions to the compensation section, emphasizing its long-standing approach of not being overly prescriptive regarding a company’s use of specific performance criteria, whether it is financial or nonfinancial (including ESG considerations), ultimately seeking to ensure that a company’s selected metrics are considered rigorous, tied to long-term performance goals related to strategic objectives or materials risks, and are presented with a sufficient level of disclosure for shareholders to conduct a review.

Vanguard added language pertaining to severance-related and golden parachute agreements (new or renewed), which clarifies their support of shareholder proposals when excessive or unreasonable severance is presented to shareholders for approval, absent a sufficient policy already adopted by the company.

Vanguard removed prior references to specific deal-breaker concerns related to compensation plans (evergreen, re-load, re-pricing), which may be reflective of Vanguard taking a more holistic approach for reviewing equity compensation plans on a case-by-case basis.

Mergers, acquisitions, and financial transactions

Vanguard revised the section pertaining to their case-by-case review and voting on mergers, acquisitions, and financial transactions. The update provides clarification of their overarching position to support or oppose such proposals based on the outlook of long-term shareholder value, specifically focusing on four key governance areas including valuation, strategic rationale, board oversight of the transaction, and the surviving entity’s governance profile. 

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