Our views on corporate governance

Vanguard's duty to fund shareholders is to maximize the long-term value of the investments held by our funds. We advocate effective corporate governance by the companies in which our funds invest because we believe that it is an important way to enhance shareholder value. The principles detailed below serve as the foundation for the guidelines we use to vote proxies on behalf of our funds. Importantly, they also represent a framework to shape our future discussions with portfolio companies on governance matters.

Independent oversight

We believe that a substantial majority of the board should be entirely independent of management. In those cases where the board chair is not independent, we believe that it is important for there to be an element of independent leadership on the board, in the form of a lead or presiding director. This director should ensure an appropriate balance between the powers of the CEO and those of the other independent directors, and should meet regularly with the independent directors without the CEO present.

Accountability

Corporate governance is, at its core, about the relationship among a company's owners (shareholders), managers, and directors. Ensuring that management is accountable to the board, and the board to shareholders, is an important incentive in the creation of value. To this end, among other things, directors should be subject to annual elections by majority vote and executive managers should see a substantial link between their compensation and company performance.

Engagement

We believe that it is important for company officials to communicate regularly with shareholders regarding areas of interest or concern. In addition, shareholders should be provided with channels through which they may communicate with the board. While boards get shareholder "feedback" through the proxy voting process, a "yes/no" vote provides only limited insight into shareholder views. We have found, through hundreds of meetings and discussions annually, that we can often accomplish more through dialogue than through the ballot.

Sensible compensation tied to performance

We believe that the majority of executive pay should depend on the creation of long-term shareholder value. An independent compensation committee should have sufficient latitude to structure pay arrangements that reward both long- and short-term achievements, but always with the focus on creating sustainable value. We value stock ownership and retention requirements because they reinforce executives' "shareholder" mindset. Executive pay, no matter how it is designed to reward performance, should always be reasonable on an absolute basis and should not unduly dilute public shareholders' interests. With respect to severance, we believe executives should be paid well when they perform well, not when they're asked to leave. Finally, companies' required disclosures of their pay practices are more useful and create more accountability if they focus as much on "why" as they do on "how much."

Shareholder voting rights consistent with economic interests

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.

Minimal anti-takeover devices and annual director elections

We believe that shareholder value is generally maximized when the market for corporate control is permitted to function freely. Classified boards, poison pills, and other takeover defenses, 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 minimized, and to the extent they are used–particularly poison pills–they should be subject to shareholder approval.

Contact us at CorporateGovernance@vanguard.com