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Governance

Vanguard handing off proxy voting to subadvisers

Vanguard’s Glenn Booraem said the move is ‘part of a much broader message around our evolving approach to investment stewardship.’

Firm says change will help investors enjoy most value in long term

Vanguard Group Inc. is shifting some of its proxy voting power to its 25 subadvisers, which collectively manage more than $471 billion in equity assets for the Malvern, Pa.-based firm.

Responsible investing experts are waiting to see how the new arrangement will play out between $5.2 trillion Vanguard and its external managers, including whether Vanguard will improve its own voting record on climate change and sustainability issues.

The decision, announced on April 26, marks a move away from Vanguard's previous protocol, in which all proxy voting for its funds was administered centrally by its investment stewardship team. By the end of 2019, Vanguard expects to complete the transition of proxy voting responsibilities for its externally managed funds.

"This decision is part of a much broader message around our evolving approach to investment stewardship," said Glenn Booraem, a principal and investment stewardship officer at Vanguard.

The move helps "ensure that the companies in which we invest, or (external managers) invest through our funds, are governed well and governed in alignment with their long-term strategy to create value for our end investors," Mr. Booraem continued.

In migrating voting power to its subadvisers, Vanguard seeks to better integrate the investment management process for each fund with the proxy voting and engagement work subadvisers already do with portfolio companies, he explained.

With the transition, Vanguard's largest subadviser by assets, Wellington Management Co., Boston, will be granted the greatest share of voting power, Mr. Booraem confirmed. Wellington manages about $230 billion in equity assets across Vanguard's funds, the company confirmed.

Vanguard is passing proxy voting duties to external managers of its funds, but, across the industry, asset managers take varied approaches to the voting process, according to Morningstar Inc., Chicago.

"There are a number of ways in which proxy votes can be divided or decentralized within (fund) complexes," said Toronto-based Jackie Cook, director, stewardship research at Morningstar.

Some fund managers have a system in which individual portfolio managers can debate major issues impacting companies in which they hold shares, "and you don't have one governance committee that hands down the vote," Ms. Cook said, adding that the process can range from "completely centralized on one hand or decentralized on the other."

Respect their practices

Under its new system, Vanguard says it is "granting the entire responsibility for proxy voting and related corporate governance activities for our actively managed funds to our subadvisers," a spokeswoman said in an email. "We are providing them with this opportunity because we respect their governance practices and processes and want to further integrate those practices and processes into the management of the funds."

Vanguard's funds boards will approve and oversee voting guidelines for each of its external managers, however, "further assuring practices that are in the best interest of the funds," she added.

Sources have emphasized that the changes at Vanguard do not mean that the firm will simply be able to hand off the work it needs to do on improving its own proxy voting record on certain issues.

In the 2018 proxy season, Vanguard landed near the bottom (42 out of 48) of a ranking examining large fund managers' support of climate-related shareholder proposals, analysis published in March by Ceres, a Boston-based sustainability non-profit working with investors and companies found.

Last year, Vanguard voted in favor of only 12% of climate-related shareholder proposals, according to the analysis.

A factor that may have prompted Vanguard's recent decision on proxy voting responsibilities could be the optics surrounding its voting record, said Rob Berridge, director of shareholder engagement at Ceres. "From our perspective, Vanguard's voting record on climate and sustainability is pretty poor," Mr. Berridge said.

"Another reason they may be doing this is they are getting pressure to improve their voting on ESG (issues)," he later added.

When asked to comment on concerns about its proxy voting record on climate and sustainability issues, the Vanguard spokeswoman said in an email: "We try to steer companies towards better disclosure of the risks that have a potentially material impact on a company's long-term value. To that end, we don't tell company leaders how to run their businesses or what business they should be in. But we — and their other shareholders — do need to understand how boards are owning and overseeing risks that could threaten the value of the funds' investments over the long term," the spokeswoman wrote.

"As such, we devote our attention to ensuring that these risks, and the board's oversight process, are consistently and comparably disclosed to the market." She added that Vanguard offers a range of indexed and active funds for "socially conscious investors in the U.S."

Voting activity

Most of Vanguard's voting activity during the proxy year ended June 30 was related to the election of company directors, capitalization matters and executive compensation, the firm noted in its April announcement. It said that "much-discussed environmental and social issues makes up a small percentage of votes cast" by the firm.

Separately, Vanguard sees proxy voting as "merely one lever that we as corporate stewards use," with another being company engagements, the spokeswoman wrote.

"Last year alone, we engaged with more than 200 companies in carbon-intensive industries and talked about numerous issues, including climate risks," she added.

Timothy Smith, director of environmental, social and governance shareowner engagement at Boston-based Walden Asset Management, the sustainable, responsible and impact investment practice of Boston Trust & Investment Management Co., said Vanguard's "own voting record continues to be absolutely crucial for them."

"Increasingly, (institutional) investors are asking asset managers how they engage on ESG issues and how they are voting. An asset owner might ask that question of an asset manager even if they are voting their own proxy," Mr. Smith said.

Additionally, with the explosion of ESG products coming from asset managers, firms must contend with the fact that it is a considerable risk for them to assume their proxy voting record doesn't matter to clients, he explained.

"Whether it's on a governance reform, or a climate or diversity disclosure, the votes have impact. Investment companies and mutual fund firms are being evaluated according to their proxy voting … and it is the duty of the fiduciary to attempt to vote their proxies responsibly," Mr. Smith said.