Vanguard Updated 2024 U.S. Proxy Voting Guidelines

In January 2024, Vanguard released its updated U.S. proxy voting guidelines that outline its 2024 stewardship approach and expectations, effective February 2024. Key changes to its U.S. proxy voting guidelines are discussed below.

Key highlights

• Clarified specific circumstances it may withhold support from a director(s) or key committee due to failure of risk oversight related to a functional role or committee-level responsibility.
• Outlines its intention to support shareholder proposals seeking diversity-related policy amendments.
• Advocates for companies to disclose additional details regarding board evaluation and refreshment to ensure a company’s approach to board composition results in meaningful diversity.
• Emphasizes the importance of independent board oversight by highlighting its process for reviewing director independence and reaffirming its preferences for effective independent leadership.
• Expects relevant engagement and disclosure to understand the commitments of various directorships served by each member of a company’s board.
• Provides further insight regarding its approach to reviewing executive compensation.
• Elaborates on its expectations for companies to adopt appropriate governance structures that safeguard shareholder rights.

Introduction

Vanguard revised the Introduction to its U.S. proxy voting guidelines by emphasizing the application of its policy and approach to investment stewardship over an extended period of time, potentially signaling their intent to apply future accountability votes against directors based on lack of responsiveness or failure to provide effective oversight of ESG-related matters as they continue to evolve.

Board Composition

New for 2024, Vanguard added a Board Composition provision stating its expectations pertaining to a company’s approach on Board Composition, including disclosure relating to diversity and strategic board-related processes and planning. In summary, Vanguard expects boards be “fit for purpose” by reflecting sufficient diversity of skills, experience, perspective, and personal characteristics (such as gender, age, race, and ethnicity) resulting in cognitive diversity that enables effective, independent oversight on behalf of all shareholders. In addition, this year, Vanguard further clarified that it believes that the appropriate mix of skills, experience, and characteristics should reflect expertise related to the company’s strategy and material risks from a variety of vantage points.

Like BlackRock, Vanguard’s collective revisions pertaining to board composition are focused on a company’s disclosure and processes for ensuring a broader approach to meaningful diversity.

Clarified its policy related to diversity and board composition disclosure expectations, detailed below:

• The company’s perspectives on the appropriateness of its board structure and composition in supporting the company’s strategy, long-term performance, and shareholder returns.
• How a board’s composition will evolve over time, enabling shareholders to better understand how the board is positioned to serve as effective, engaged stewards of shareholders’ interests.
• Reflect diversity of attributes including tenure, skills, and experience at the director level (sometimes referred to as a “skills matrix”).
• Directors’ personal characteristics (such as race and ethnicity) to occur on a self-identified basis on an aggregate level or individual director level.
• The process for evaluating the composition and effectiveness of a company’s board on a regular basis.

Further, Vanguard may support shareholder proposal requests for disclosure of a company’s approach to board composition, inclusive of board diversity.

Board Composition and Effectiveness

Vanguard added language clarifying its expectations and process for reviewing board and key committee independence. Vanguard expects a majority of directors to be independent, as should all the members of the board’s key committees.

While Vanguard generally relies upon the relevant exchange listing or regulatory requirements in establishing a director’s independence, there may be instances (such as former CEOs) in which directors who may be “technically independent” are considered non-independent after engagement and/or research by Vanguard.

If upon assessment a board’s or committee’s composition is inconsistent with Vanguard’s independence standards, Vanguard may not support the non-independent nominees on the board/committee and members of the nominating/governance committee on the ballot.

Director Capacity and Commitments

Vanguard added language clarifying its expectations for companies to provide further disclosure pertaining to directors that may be potentially overboarded.

The revised language states that “Vanguard seeks to understand whether the number of directorship positions held by a director makes it challenging to dedicate the requisite time and attention to effectively fulfill their responsibilities at each company (sometimes referred to as being “overboarded”).”

In its policy update, Vanguard states its willingness to engage on this topic while advocating for companies to provide further transparency on any overboarding exceptions or policies, temporary or not.

Director and Committee Accountability

Vanguard revised its language clarifying it may withhold support from directors deemed responsible “generally based on their functional or committee-level responsibilities, if there are instances in which the board has failed to respond to actions approved by a majority of shareholders, unilaterally taken action against shareholder interests, or, in Vanguard’s view, failed in its oversight role.”

The additional language confirms Vanguard’s intent to withhold support from directors under the specific conditions as identified above, providing further insight regarding Vanguard’s considerations for board oversight failure.

Independent Board Leadership

Vanguard revised its language stating it “generally believes that determining the appropriate independent board leadership structure should be within the purview of the board.”

While it has been a historical practice of Vanguard to defer to a company or board to determine an effective structure for independent board leadership, the additional language confirms Vanguard’s preference that “shareholders’ interests are best served by board leadership that is independent of company management”, whether in the “form of an independent chair of the board or a lead independent director - with sufficiently robust authority and responsibilities.”

Advisory Votes on Executive Compensation – Say on Pay

Vanguard revised its Say on Pay section by adding further context regarding each of the three pay-related categories for which it performs an evaluation, including Alignment of Pay and Performance, Compensation Plan Structure, and Governance of Compensation Plans (formerly referred to in the policy as “Other Considerations”):

• Alignment of Pay and Performance – Vanguard looks for evidence of clear alignment between pay outcomes and company performance. This is mainly assessed through alignment of incentive targets with corporate strategy, and analysis of three-year total shareholder return and realized pay over the same period vs. a relevant set of peer companies. If there are concerns that pay and performance are not aligned, Vanguard may vote against a pay-related proposal.
• Compensation Plan Structure – Plan structures should be aligned with the company’s stated long-term strategy and should support pay-for-performance alignment. Where a plan includes structural issues which Vanguard determines to have led to, or could in the future lead to, pay-for-performance misalignment, Vanguard may vote against a pay-related proposal. For compensation structures which are not typical of a market, Vanguard looks for specific disclosure demonstrating how the structure supports long-term value creation for shareholders.
• Governance of Compensation Plans – Vanguard looks for boards to have a clear strategy and philosophy on executive pay, utilize robust processes to evaluate and evolve executive pay plans, and implement executive pay plans responsive to shareholder feedback over time. Vanguard also looks for boards to explain these matters to shareholders via company disclosures. Where pay-related proposals consistently receive low support, Vanguard looks for boards to demonstrate responsiveness to shareholder concerns.

Vanguard further indicates where such warning signs exist, elements of strong compensation governance, such as board responsiveness and disclosure that includes data, rationale, and alternatives considered, can sometimes serve to mitigate these concerns.

While it has been a historical practice of Vanguard to consider each of these three pay-related categories in its review process regarding Say on Pay proposals, the additional language confirms Vanguard’s preference for companies to provide robust disclosure to effectively address concerns related to any of the three confirmed categories.

Vanguard also provides further insight regarding its third category, previously referred to as “Other Considerations,” now identified as Governance of Compensation Plans, signaling an opportunity for company boards and compensation committees to mitigate such concerns by exhibiting responsiveness and committing to strong compensation governance.

Shareholder Rights

Vanguard added language to the introduction of its Shareholder Rights provision stating its intention to generally support shareholder proposals “irrespective of the proponent - that seek approval for governance structures that safeguard shareholder rights (and oppose those that do not).”

Advance Notice of Shareholder Proposals

Vanguard added language stating its expectation for adoption of advance notice requirements to include “reasonable disclosure and ownership requirements that are not overly restrictive or burdensome for shareholders.”

While Vanguard’s existing position is to generally support management proposals to “adopt advance notice requirements if the provision provides for notice of a minimum of 30 days and a maximum of 120 days before the meeting date and a submission window of at least 30 days prior to the deadline”, the added language provides additional insight beyond the standardized timing for acceptance, advocating for some flexibility regarding disclosure and ownership requirements.

Exclusive Forum/Exclusive Jurisdiction

Vanguard added language stating it “will generally give companies latitude on organizational matters and, with respect to state forum selection provisions, will generally support proposals to designate state courts in Delaware, or a company’s state of incorporation or principal place of business. Any such choice of a state or federal court should be broad-based, rather than limited to a specific court within a state.” Vanguard “will consider withholding support from governance committee members when a company unilaterally adopts a provision that meaningfully limits shareholders’ rights without a compelling rationale for the choice of forum.”

The additional language provides further insight regarding Vanguard’s approach to reviewing such proposals based on flexibility within each applicable jurisdiction.

Vanguard further confirms its intention to apply an accountability vote for unilateral adoption of a forum provision with a negative impact on shareholder rights.

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