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Nov 27, 2017

Vanguard’s McNabb urges board engagement with shareholders

Uptick in issuer engagement has been ‘remarkable’ in last five years but directors need to be involved, CEO says

The growing movement of money from active to passive funds means that boards should more actively engage with shareholders on governance issues, according to Vanguard CEO and chair William McNabb.

Issuer engagement with Vanguard has increased by roughly 20 percent year-on-year since 2012, with the asset management firm taking around 1,000 meetings with companies in 2017. McNabb, speaking at a recent NIRI New York chapter event, described this increase as ‘remarkable,’ but urged directors to play a more active role in talking to shareholders.

‘We have the expectation that independent directors will engage with their owners, their investors,’ he said. ‘There are still very prominent companies where that’s not happening and where we hear from CEOs that this will not happen. I’m completely baffled by this. I thought boards were standing in mostly for shareholders.’

This situation holds an opportunity for governance and IR teams to help facilitate conversations between boards and key shareholders, McNabb said. He suggested that boards may consider developing small sub-committees that are responsible for investor outreach.

The growing level of dialogue around ESG issues and the rise of shareholder activism are increasing the degree of co-operation between IR and governance teams on engagement issues (, 11/2).

The continuing trend of money moving from active to passive funds makes the need for board engagement with shareholders more pressing, McNabb said. Just over a third of all assets in the US are in a passive fund, up from one fifth a decade ago, according to data from Bloomberg.

He cautioned that companies should not assume that an index fund will be passive on ESG issues, with Vanguard having shown this year that it is willing to vote against companies that don’t meet its guidelines – most notably siding with a successful shareholder proposal for greater environmental risk-related disclosure at Exxon Mobil.

‘We focus on big governance principles and believe that companies that are better governed over the long-term will produce better results,’ McNabb said. ‘There’s no concrete proof that this is right, but I believe that it’s asymmetric. It can’t hurt and it really does help.’

In his summer letter to portfolio companies (, 9/13), McNabb points to the asset manager’s evolving position on board diversity and climate-risk as a sign that it was expanding its definition of what could help or hinder long-term value creation.  

‘I think when we look back in history, we’ll look at this period as a very seminal time where we’ve shifted the emphasis back to longer-term value creation from what I would say is a period of excessive short-termism,’ he said at the NIRI event.

This focus on long-term value creation means that Vanguard is open to siding with activist investors if they represent a better long-term focus than the existing board, McNabb explained. ‘If an activist is involved in a company, we’re always looking at whether it’s constructive and long-term oriented…these are very nuanced conversations and they tend to be way deeper and way more involved than is ever going to be reported by the press,’ he added.

McNabb recommended meeting with activists to understand how they work and what they’re looking for when assessing companies. ‘Bring somebody in to talk to you about your governance, your strategy and how they would look at your company. It’s very healthy,’ he said.

McNabb will step down as CEO of Vanguard at the end of this year to be replaced by Tim Buckley, the firm’s chief investment officer. McNabb will continue to serve as the firm’s chair.