Want good corporate governance? Focus on board composition

November 13, 2019

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Glenn Booraem

Glenn Booraem

Glenn Booraem and his team have spent thousands of hours talking to board members and leaders of the companies in which Vanguard funds invest—all with the goal of promoting better standards for corporate governance. Vanguard believes that good governance can protect and enhance shareholder value over time—that's why the Investment Stewardship team votes proxies, meets (or "engages") with portfolio companies, and publicly advocates for good governance.

While companies can be quite different from one another, each has a board of directors. That's why Mr. Booraem, Vanguard's Investment Stewardship officer, said his team focuses intently on boards: "Good governance starts with a company's board of directors."

The board oversees a company's strategy and risks while representing the interests of all shareholders. It's a great responsibility. So it makes sense that board composition (i.e., the people who serve on the board) was a topic of discussion with an overwhelming majority of the 868 companies Vanguard engaged with during the 12 months ended June 30, 2019.

While those conversations can cover a variety of topics ranging from executive compensation to basic shareholder rights, Vanguard believes that when boards are well composed, and when they have a true appreciation of the interests of their longest-term shareholders, that can result in better returns for our investors over the long run.

"We start with the premise that our index funds could conceivably own stock in a company forever—or as long as the company is included in the benchmark index," Mr. Booraem said. "That informs the way we think about sustainable investing and about the board members our funds vote for."

With many Vanguard investors, especially those saving for retirement with investment horizons that span decades, it's not surprising that Vanguard believes such a mind-set benefits investors. "We think about both board diversity and sustainability as really about supporting long-term value of portfolio companies to end investors. That's our reason for existence," Mr. Booraem said. "One of the things I love about our stewardship team is that we get to take a stand for all investors every day and give them a better chance for investment success over the long term. It's how we fit and where we add value."

Standing for greater boardroom diversity

The belief, supported by research, that diverse boards make better decisions has driven Vanguard to increase advocacy for not only a greater representation of women on corporate boards but also diversity in other dimensions, including race, ethnicity, national origin, and age. In recent years, Vanguard has advanced these conversations with thousands of companies across the globe. There might not be a global, one-size-fits-all approach because of cultural differences, but these engagements have enabled us to raise the issue that all boards can benefit from a broader range of perspectives.

To help companies around the globe take action, Vanguard created a summary of expectations for board diversity at public companies.

Our board diversity expectations of public companies

1. Publish your perspectives on board diversity.
Here's what we ask companies: Does you board share its policies and perspectives on diversity? How do you approach board evolution? What steps do you take to get the widest range of perspectives and avoid groupthink? Vanguard and other investors want to know.

2. Disclose your board diversity measures.
We want companies to disclose the diversity makeup of their boards on dimensions such as gender, age, race, ethnicity, and national origin, at least on an aggregate basis.

3. Broaden your search for director candidates.
We encourage boards to look beyond traditional candidate pools—those with CEO-level experience—and purposely consider candidates who bring diverse perspectives into the boardroom.

4. Make progress on this front.
Vanguard expects companies to make significant progress on boardroom diversity across multiple dimensions and to prioritize adding diverse voices to their boards in the next few years.

Increasing board diversity is a major priority for the Vanguard Investment Stewardship team, but Mr. Booraem stresses that patience is important to ensure the right decision is made.

"We don't want companies making decisions just to check a box," Mr. Booraem said. "We want them to do the right thing and find the right people. Some decisions may take longer than others. The important factor is the board is open to the adoption of change and responsive to their owners' questions or concerns."

Sustainability is synonymous with 'long-termism'

Since Vanguard's founding in 1975, one of our key messages has been to think long-term. It's no surprise then that Vanguard wants companies to make decisions around governance with the future in mind.

The decisions a board makes can affect a company's value in both the short term and the long term. Vanguard doesn't seek to influence corporate strategy but rather challenges the board and management to think about how their strategies can stay relevant over time and help investors.

While he still thinks there's work to be done to get more companies to adopt "long-termism" for governance, Mr. Booraem is encouraged by a growing trend he's seen over the past 18 years.

"Companies have a growing appreciation and understanding of steering their company not quarter by quarter but making decisions around governance, strategy, and risk assessment that are looking forward over the course of decades," Mr. Booraem said. "It's good to see board governance aligning with the long-term approach many of our clients have when it comes to their investments, and we hope to see the trend continue."

The road toward good governance

Mr. Booraem sees the move toward more diverse boards and the shift to a long-term mind-set as positive steps and says Vanguard's efforts are making a difference for shareholders.

"We're seeing an increase in accessibility and responsiveness of corporate boards to shareholder input. One of the things you'll see in our latest stewardship report is further progress in this area," Mr. Booraem said. "More companies are listening, and more discussions include independent members of the board. It's a journey we've been on for some time. It's absolutely moving in the right direction."

While the governance ecosystem has improved in the last 20 years, there's still more work to do. Mr. Booraem said that, for example, there are opportunities for smaller companies to adopt leading governance practices and for those practices to be more consistently embraced as governance norms globally. Vanguard investors would also benefit from companies, shareholders, and other stakeholders shifting the dialogue to be more focused on long-term, sustainable value. In each of these lanes, Investment Stewardship's role as the voice of the long-term investor will have a significant impact on the direction of travel.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.