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Passive investors, not passive owners

April 22, 2013

A look at Vanguard's approach to proxy voting

Glenn H. Booraem, controller of the Vanguard funds, is responsible for Vanguard's global fund accounting operations, which includes execution and/or oversight of fund accounting and security valuation, fund compliance monitoring, and corporate governance operations for Vanguard's investment products worldwide. He is a member of the Vanguard Pricing Review Committee, Proxy Oversight Group, and Disclosure Oversight Group. Mr. Booraem has also served on the New York Stock Exchange's Proxy Working Group and Commission on Corporate Governance.

Glenn Booraem About a year ago we restated Vanguard's mission to read: "To take a stand for all investors, treat them fairly, and give them the best chance for investment success." While the words were new, the ideals were not; they've been the consistent principles by which we've managed our enterprise since our founding.

As we stand on the cusp of "proxy season"—when investors in most U.S. companies will vote at shareholder meetings on matters including the election of directors and the approval of compensation plans—it strikes me that nothing better exemplifies our mission in action than our efforts to ensure that the companies in which our funds invest are subject to the highest standards of corporate governance.

"While our approach of quiet diplomacy focused on results, as opposed to noisy activism to gain attention, has led some to conclude that our voice is silent on many debates, we believe that our effectiveness is maximized by taking our message directly to those companies where we believe changes are needed, not by litigating matters in the court of public opinion."

As major and practically permanent holders of most companies by virtue of our significant index franchise, we have a vested interest in ensuring that governance and compensation practices support the creation of long-term value for investors—a key to achieving investment success. We believe that effective corporate governance structures strike an appropriate balance between and among the rights and responsibilities of owners, directors, and managers. Likewise, compensation programs should be calibrated to incent and reward long-term performance relative to the performance of relevant peers and the market; performance in this context must be sustainable and enduring, not the sometimes fleeting advances in stock prices sought by traders and arbitrageurs.

Our advocacy on this front is driven by governance and compensation principles that reflect our long-standing views on best practices. The most visible component of this advocacy is our funds' proxy voting at shareholder meetings; every vote we cast is publicly disclosed annually. We have an experienced team of analysts that independently evaluates each proposal in the context of our voting guidelines and casts our funds' votes accordingly.

However, by its nature, voting reduces often complex issues to a binary choice—between FOR and AGAINST a particular proposal—making the proxy vote a rather blunt instrument. This is where the second—and perhaps more important—component of our governance program takes over; engagement with directors and management of the companies in which we invest provides for a level of nuance and precision that voting, in and of itself, lacks. So while voting is visible, it tells only part of the story.

We believe that engagement is where the action is. We have found through hundreds of direct discussions every year that we are frequently able to accomplish as much—or more—through dialogue as we are through voting. Importantly, through engagement, we are able to put issues on the table for discussion that aren't on the proxy ballot. We believe that our active engagement on all manner of issues demonstrates that passive investors don't need to be passive owners. We strive in all of our engagements to provide constructive input that will, in our view, better position companies to deliver sustainable value over the long term for all investors. While our approach of quiet diplomacy focused on results, as opposed to noisy activism to gain attention, has led some to conclude that our voice is silent on many debates, we believe that our effectiveness is maximized by taking our message directly to those companies where we believe changes are needed, not by litigating matters in the court of public opinion.

Despite these significant efforts, uninformed commentary continues to equate voting against management and for shareholder proposals as "evidence" of attention to governance. This is far too simplistic a view. To be sure, there are companies whose practices are in need of change and shareholder proposals worthy of attention, but broad-brush condemnation of corporate initiatives and blind support for shareholder proposals—irrespective of the shareholder value case behind them—ignore the complexity of the issues at hand. We believe that our independent analysis, supported by substantive engagement, puts us in the best position to both vote on an informed basis and influence corporate behavior appropriately.

The bottom line is that we believe that the vast majority of boards and management teams are appropriately focused on the same long-term value objectives as we are. This translates into broad support for most matters proposed by corporate boards. Do we always get it right? Probably not. Are there votes that, in retrospect, we'd reconsider? Absolutely.

In this regard, we will never be as good as we aspire to be, and, to that end, we continue to evolve and refine our approach to corporate governance in the service of our mission to take a stand for all investors, treat them fairly, and give them the best chance for investment success—one company, and one vote, at a time.

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