Vanguard Releases 2024 U.S. policy updates
Vanguard has published its 2024 U.S. proxy voting guidelines which take effect in February 2024¹. Overall, Vanguard has enhanced its disclosure expectations related to board composition and provided more details on its approach to executive compensation programs, advance notice requirements and exclusive forum provisions. The updates are further delineated below.
- Board and committee independence: Vanguard is relaxing its majority independence standard for the entire board at controlled companies (those in which a majority interest is held by company insiders or affiliates). However, it expects a majority of key committee members at controlled companies to be independent.
- Board composition: Vanguard has added a new section to its guidelines on board composition that replaces its discussion on diversity and qualifications disclosure. Vanguard looks to companies to disclose their perspectives on the appropriate board structure and composition and how these elements support the firm’s strategy, long-term performance and shareholder returns. It wants issuers to provide regular disclosure regarding their director nomination process, their process for evaluating board composition and effectiveness, and their identification of gaps and opportunities to be addressed through board refreshment and evolution. Vanguard expects disclosure of each director’s tenure, skills and experience in a skills matrix. Disclosure of directors’ personal characteristics (such as gender, race and ethnicity) may be done on an aggregate or individual director level.
- Escalation process for director and committee accountability: In certain instances, Vanguard will vote against directors as a means of expressing concern regarding governance failings or other issues that are unaddressed by a company. It has eased its policy of penalizing boards for not making sufficient progress on board diversity. Instead, absent a compelling reason, Vanguard will vote against the nominating/ governance committee chair, or another relevant board member, if the board is not taking action to achieve board composition that is appropriately representative, relative to its market and the needs of its long-term strategy.
- Executive compensation (say on pay): Vanguard has provided further elaboration on the three categories of factors that it considers when evaluating executive pay:
- Alignment of pay and performance: Vanguard looks for a clear alignment between pay outcomes and company performance. This is mainly assessed through the alignment of incentive targets with corporate strategy and an analysis of three-year total shareholder return and realized pay over the same period versus a relevant set of peer companies. If pay and performance do not appear 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 (PFP) alignment. Where a plan includes structural issues which have or could lead to PFP misalignment, Vanguard may vote against a pay-related proposal.
- Governance of compensation plans: Boards should have a clear strategy and philosophy on executive pay, utilize robust processes to evaluate and evolve executive pay plans, and implement executivepay plans responsive to shareholder feedback over time. Vanguard expects boards to demonstrate responsiveness to shareholder concerns where pay-related proposals consistently receive low support.
Where Vanguard has a high or moderate level of concern regarding an executive compensation plan, it will consider elements of strong compensation governance as a mitigating factor–namely, board responsiveness and disclosure that includes data, rationale and alternatives considered.
- Poison pills: Vanguard has clarified that it will generally support poison pills that are short-term in nature (typically a term of one year or less). It prefers that a pill be put to a shareholder ratification vote at the next practicable annual meeting and each subsequent annual meeting while it is in place. Vanguard’s policy of generally supporting net operating loss (NOL) poison pills remains the same.
- Advance notice of shareholder proposals: Vanguard generally supports the adoption of advance notice requirements that provide for a notice period of between 30 and 120 days before the meeting date with a submission window of at least 30 days prior to the deadline. It has expanded this policy to stipulate that related provisions should provide for reasonable disclosure and ownership requirements that are not overly restrictive or burdensome for shareholders.
- Exclusive forum provisions: Vanguard has expanded its discussion of exclusive forum provisions, which it evaluates case by case. It will generally support provisions that designate state courts in Delaware, or a company’s state of incorporation or principal place of business. The choice of a state or federal court should be broad-based rather than limited to a specific court within a state. Vanguard will consider voting against the members of the governance committee if a company unilaterally adopts an exclusive forum provision that meaningfully limits shareholder rights unless there is a compelling rationale for the choice of forum.
¹ See Vanguard’s 2024 U.S. guidelines here
