Vanguard's proxy voting guidelines
Proxy voting report
The Board of Directors (the "Board") of Vanguard® Investments Australia Ltd has adopted proxy voting procedures and guidelines to govern proxy voting in companies where Vanguard's managed investment schemes ('funds') have a significant economic interest. This Policy applies both to votes relating to domestic equities, as well as to international equities. The Board has delegated oversight of proxy voting to the Proxy Oversight Committee (the "Committee"), and subject to the procedures and guidelines described below. Aggregate voting results are published on the Vanguard Australia website. Clients operating separate accounts may make arrangements for Vanguard to vote proxies for those portfolios, in accordance with Vanguard policies.
The overarching objective in voting is simple: to support proposals and director nominees that maximise the value of a fund's investments - and those of fund unitholders - over the long term. While the goal is simple, the proposals the funds consider are varied and frequently complex. As such, the guidelines provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented.
For ease of reference, the procedures and guidelines often refer to all funds, however, our policies and practices seek to ensure that proxy voting decisions are suitable for individual funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the funds and the funds voting as a block. In some cases, however, funds may vote differently, depending upon the nature and objective of each fund, the composition of its portfolio, and other factors.
Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting some or all of its shares if doing so would be in the fund's and its unitholders' best interests. These circumstances may arise, for example, when the expected cost of voting exceeds the expected benefits of voting, when exercising the vote results in the imposition of trading or other restrictions, or if a fund (or all Vanguard advised funds in the aggregate) were to own more than a maximum percentage of a company's stock (as determined by the company's governing documents or by applicable law, regulation or regulatory agreement).
In evaluating proxy proposals, we consider information from many sources, including but not limited to, the Portfolio Manager for the fund, management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company's board, absent guidelines or other specific facts that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Committee, who are accountable to the Board.
While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the fund's vote in a manner that, in the Committee's view, will maximise the value of the fund's investment, subject to the individual circumstances of the fund.
The board of directors
Election of directors
Good governance starts with a majority-independent board, whose key committees are comprised entirely of independent directors. As such, companies should attest to the independence of directors who serve on the Remuneration, Nomination, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained by the company.While the funds will generally support the board's nominees, the following factors will be taken into account in determining each fund's vote:
Factors for approval
- Nominations results in board comprised of a majority of independent directors.
- All members of audit, nomination, and remuneration committees are independent of management.
Factors against approval
- Nominations results in board comprised of a majority of non-independent directors.
- Audit, nomination, and/or remuneration committees include non-independent members.
- Incumbent board member failed to attend at least 75% of meetings in the previous year.
- Actions of committees on which nominee serves are inconsistent with other guidelines (e.g., excessive option grants, substantial non-audit fees, lack of board independence).
Contested director elections
In the case of contested board elections, we will evaluate the nominees' qualifications and the performance of the incumbent board, as well as the rationale behind the dissidents' campaign to determine the outcome that we believe will maximise shareholder value.
In relation to companies in non-Australian markets where classified boards are permitted, the funds will generally support proposals to declassify existing boards (whether proposed by management or shareholders) and will block efforts by companies to adopt classified board structures, in which only part of the board is elected each year.
Approval of independent auditors
The relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. The funds will generally support management's recommendation for the ratification of the auditor except in instances where audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether independence has been compromised.
Stock-based remuneration plans
Appropriately designed stock-based remuneration plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders and the interests of management, employees, and directors. Conversely, the funds oppose plans that substantially dilute their ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features.
An independent remuneration committee should have significant latitude to deliver varied remuneration to motivate the company's employees. However, we will evaluate remuneration proposals in the context of several factors (a company's industry, market capitalisation, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the company's other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account.
The following factors will be among those considered in evaluating these proposals:
Factors for approval
- Company requires senior executives to hold a minimum amount of company stock (frequently expressed as a multiple of salary).
- Company requires stock acquired through option exercise to be held for a certain period of time.
- Remuneration program includes performance-vesting awards, indexed options, or other performance-linked grants.
- Concentration of option grants to senior executives is limited (indicating that the plan is very broad-based).
- Stock-based remuneration is clearly used as a substitute for cash in delivering market-competitive total pay.
Factors against approval
- High total potential dilution (including all stock-based plans).
- Excessive annual option grants.
- Plan permits repricing or replacement of options without shareholder approval.
- Plan provides for the issuance of reload options.
- Plan contains automatic share replenishment ("evergreen") feature.
Bonus plans should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive in both absolute terms and relative to a comparative group generally will not be supported.
Employee stock purchase plans
The funds will generally support the use of employee stock purchase plans to increase company stock ownership by employees provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan comprise less than 5% of the outstanding shares.
Executive severance agreements ("golden parachutes")
While executives' incentives for continued employment should be more significant than severance benefits, there are instances - particularly in the event of a change in control - in which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executive's salary and bonus may generally be approved by the remuneration committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonus - or where severance is guaranteed absent a change in control - should be submitted for shareholder approval.
Local nuances and laws will be considered in making decisions in relation to resolutions regarding executive remuneration.
Corporate structure and shareholder rights
We believe that shareholders' say in important matters should be proportional to their ownership interest in a company. A simple majority of shares outstanding should be sufficient to approve virtually any matter subject to shareholder approval. Companies should not create classes of stock that disproportionately give one class more votes per share than the common share class.
We believe that shareholder value is generally maximised when the market for corporate control is permitted to function freely. For example, in the U.S. classified boards, poison pills, and other takeover defences, particularly in combination with one another, are generally at odds with this perspective. While we appreciate that these measures may enhance the board's negotiating leverage in certain instances, we are concerned with their potential to reduce board accountability. Accordingly, we believe that these provisions should be minimised, and to the extent they are used - particularly poison pills - they should be subject to shareholder approval.
We will support motions that shareholder votes be by poll.
The integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, the funds support proposals to provide confidential voting.
The funds are opposed to dual-class capitalisation structures that provide disparate voting rights to different groups of shareholders with similar economic investments. As such, the funds will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes.
Corporate and social policy issues
While shareholder resolutions are rare in Australia, this section is very relevant to our international equities funds. Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. The Board generally believes that these are "ordinary business matters" that are primarily the responsibility of management and should be evaluated and approved solely by the corporation's board of directors. Often, proposals may address concerns with which the Board philosophically agrees, but absent a compelling economic impact on shareholder value, the funds will typically abstain from voting on these proposals (except in those cases where abstentions do not count as votes cast, in which case we would typically vote against). This reflects the belief that regardless of our philosophical perspective on the issue, these decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund's investment and management is not responsive to the matter.
Vanguard understands that people have a wide variety of deeply felt humanitarian, ethical, environmental, and social concerns, and that some may want to see their beliefs reflected in their investments.
As a responsible entity, Vanguard is required to manage our funds in the best interests of unitholders and is obliged to maximise returns in order to help unitholders meet their financial goals. It would be exceedingly difficult, if not impossible, to fulfill these obligations while managing portfolios that reflect the social concerns.
Voting in international markets
Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside Australia in which the funds may invest. Each fund's votes will be used, where applicable, to advocate for improvements in governance and disclosure by each fund's portfolio companies. We will evaluate issues presented to shareholders for each fund's international holdings in the context of the guidelines described above, as well as local market standards and best practices. The funds will cast their votes in a manner believed to be philosophically consistent with these guidelines, while taking into account differing practices by market. In addition, there may be instances in which the funds elect not to vote, as described below.
Many international markets require that securities be blocked or reregistered to vote at a company's meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements.
The costs of voting (e.g., custodian fees, vote agency fees) in international markets may be substantially higher than for Australian holdings. As such, the fund may limit its voting on international holdings in instances where the issues presented are unlikely to have a material impact on shareholder value..
Voting shares of a company that has an ownership limitation
Certain companies have provisions in their governing documents that restrict stock ownership in excess of a specified limit. The ownership limit may be applied at the individual fund level or across all Vanguard-advised funds. Typically, these ownership restrictions are included in the governing documents of real estate investment trusts, but may be included in other companies' governing documents.
A company's governing documents normally allow the company to grant a waiver of these ownership limits, which allows a fund (or all Vanguard-advised funds) to exceed the stated ownership limit. Sometimes the company will grant a waiver without restriction. From time to time, a company may grant a waiver only if a fund (or funds) agrees to not vote the company's shares in excess of the specified limit. In such a circumstance, a fund may refrain from voting shares if owning the shares beyond the company's specified limit is in the best interests of the fund and its unitholders.
There may also be applicable laws, regulations or regulatory agreements that restrict stock ownership in certain companies in excess of a specified limit. In any of these circumstances, the fund may refrain from voting shares beyond the specified maximum or may vote in a particular way (e.g. mirror vote shares in accordance with the company's entire shareholder base) because of an agreement with a regulatory authority (e.g. the Board of Governors of the United States Federal Reserve System) that allows the fund to own shares above the applicable limit.
The Board may review these procedures and guidelines and modify them from time to time.