Update on proxy voting-June 30, 2013

The Vanguard funds, as owners of over $1 trillion in common stocks, continued to exercise one of their fundamental ownership rights–voting by proxy at shareholders meetings–in the 12 months ended June 30, 2013. This report provides an overview of how the funds voted on proposals from approximately 4,000 U.S. companies during that period.

Vanguard's objective in proxy voting is to support actions that maximize the value of each fund's investment in a company's stock and, consequently, of our shareholders' investments in the funds. To this end, each fund's board of trustees has adopted guidelines that govern proxy voting decisions. We devote substantial resources to evaluating proposals in light of these guidelines, which are available through to both fund shareholders and portfolio companies. In addition to voting, we advocate effective corporate governance by frequently discussing issues directly with directors and executives of the companies in which our funds invest.

We posted on and filed with the Securities and Exchange Commission detailed records showing how each of the Vanguard funds voted during the year ended June 30. We have prepared the following summary report to more fully explain–both to fund shareholders and to company directors and executives–our approach to corporate governance and proxy voting.* In addition, we share our observations of some recent trends. The accompanying table shows overall voting results in several significant categories.

Election of Directors

During the year ended June 30, the funds voted on approximately 20,000 director nominees at approximately 4,000 companies. In the vast majority of cases, the slate of nominees was recommended by the company. In 86% of these uncontested elections, the funds fully supported the company-proposed slates by voting for all of the nominees. In the remaining cases, we supported only a fraction of the individuals on a company slate, or we withheld support altogether. Furthermore, we voted in favor of 95% of the individual nominees we considered over the period. In contested elections, which occurred at 16 companies when dissident shareholders sought board seats through a proxy contest, the funds voted for management's nominees 81% of the time.

In uncontested elections, we supported directors when the majority of the board was independent, key board committees were fully independent, there were no director attendance concerns, and committee actions were consistent with our voting guidelines. When the funds did not support nominees, the reasons varied but were directly related to the goal of maximizing shareholder value. In general, the funds withheld votes for one of three reasons:

  • The nominee served on a committee whose actions were inconsistent with the funds' voting guidelines. Examples include: compensation committees that awarded excessive compensation, audit committees that permitted excessive spending on non-audit work performed by the independent auditor, and nominating committees that recommended insufficiently independent candidates for the board. Most instances involved unsatisfactory compensation committee nominees and practices.
  • The nominee served on the compensation, audit, or nominating committees and was deemed non-independent under the funds' voting guidelines.
  • The nominee attended fewer than 75% of total board and committee meetings.

Compensation Issues

The funds, as shareholders, vote on a number of different matters affecting compensation of employees (including executives) and directors. In addition to voting on directors who serve on the compensation committee of the board, we vote on equity-based (e.g., stock option or restricted stock) plans and various bonus programs. In assessing these proposals, we consider a number of factors, including the design of the plan and how well it has been supervised by the compensation committee. Moreover, the compensation plans that effectively align the interests of employees and directors with those of shareholders–without unduly diluting the shareholders' interests–were more likely to gain the funds' support. On the other hand, we were more apt to oppose plans that authorized enough shares to create the potential for substantial voting dilution and/or those in which the rate of the company's options grants (measured as a percentage of shares outstanding) appeared excessive. Taking these factors into account, the funds voted in favor of more than 88% of the employee compensation proposals presented.

Starting in January 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act required most public companies to obtain non-binding advisory votes by shareholders on executive compensation programs. Over the past year, these so-called "Say on Pay" proposals appeared on the ballot at nearly 2,700 companies held by the funds. In determining the funds' votes on these proposals, we evaluated whether the design of a company's compensation program, as well as the compensation committee's decision-making processes, appropriately aligned pay with performance and resulted in compensation that was reasonably aligned with that of relevant peers. Throughout the year, we held many discussions with portfolio company officials about compensation matters. Though varied in content and outcome, these discussions fell generally into a couple of categories:

  • Clarification of the link between pay and performance. Many of our conversations with company leaders included suggestions for enhanced disclosures in the company's Compensation Discussion & Analysis (CD&A). In a few cases, the conversations led to supplemental proxy filings to clarify certain points about a compensation program.
  • Communication of specific concerns about a company's pay program or practices. Even though we have tended to provide independent compensation committees with substantial latitude in structuring pay, there were instances in which we sought insight into the rationale for certain decisions. The clarity with which company officials were able to address our concerns had a direct bearing on our support for the Say on Pay proposal. Additionally, we used these conversations as an opportunity to share direct feedback regarding changes we want to see.

Based on our analysis and engagement with company officials, the funds supported 96% of Say on Pay proposals during the year ended June 30. This relatively high level of support reflects that a number of companies have been responsive to shareholder concerns and implemented meaningful change to their compensation programs. In particular, we have found that a number of companies have made significant improvements as a result of feedback that we have provided along with other investors.

Another ballot item mandated by Dodd-Frank is an advisory vote on severance arrangements. This proposal is required when companies put a merger or acquisition transaction to a shareholder vote. Last year, there were 135 such proposals and we voted against 81% of them because at least one executive in each transaction was receiving compensation subject to a so-called "single-trigger" change in control arrangement. A single-trigger change in control entitles an executive to compensation in the event of a corporate transaction such as a merger, regardless of the effect of the event on the executive's job.

Ratification of Auditors

Although most companies are not required to seek shareholder ratification when they choose an independent auditor, many are doing so–a practice that the funds support. In evaluating these proposals, we consider how much compensation the company has previously paid the audit firm for services other than the audit itself and closely related work. We have concerns about the auditor's ability to remain truly independent when non-audit fees (including fees for tax work) exceed the audit-related charges paid by the company. In such cases, the funds generally voted against the company's recommendation to ratify the auditor. In all, the funds voted against auditor ratification at approximately 10 companies, which is consistent with our experience over the past several years.

Other Corporate Proposals

During the 12 months ended June 30, merger-and-acquisition activity among the companies represented in Vanguard portfolios increased from the prior year. However, M&A activity continues to be well below the levels observed before the financial crisis. The funds voted on 200 merger proposals over the year, supporting transactions if our analysis showed it would contribute to long-term value. We voted in favor of 99% of the proposed transactions, which is consistent with our levels of support in prior years.

The other company proposals typically ask for authorization of new shares, or relate to technical amendments to the company's governing documents, such as its charter and bylaws. We supported approximately 74% of the proposals to authorize additional shares or to make other capital structure changes; we voted against such proposals when they were unreasonably dilutive to current shareholders. In reviewing charter and bylaw proposals, we considered how the changes would affect the rights of shareholders. In most cases these proposals were beneficial, and the funds voted for them.

Shareholder Proposals

The last major group of proposals is those put forth by shareholders on issues ranging from governance changes to calls for various social-responsibility reforms. The range of subjects covered in shareholder proposals is broad, and the funds' votes on them have followed consistent patterns. The funds have generally supported proposals that seek to enhance director accountability and reduce barriers to shareholder action. For example, the funds supported certain proposals to eliminate classified boards, remove supermajority voting requirements (to adopt a majority of outstanding shares requirement), or require shareholders' approval of such matters as extraordinary severance agreements (i.e., "golden parachutes") and shareholder-rights plans (i.e., "poison pills"). On the other hand, the funds generally did not support proposals that would mandate specific actions with respect to executive compensation (limiting the discretion of an independent compensation committee), or call for separating the duties of chief executive and chairman of the board.

With respect to social and environmental shareholder proposals, the funds typically abstained from voting. 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 company management is not responsive to the matter. For more information on our views on social concerns and investing, please visit "Vanguard's View: Social Concerns and Investing".

Engagement with portfolio companies

As in previous years, we spent a significant amount of time engaging–whether in writing, conference calls, or face-to-face meetings–with management and board members of portfolio companies regarding potential governance and, as previously discussed, compensation issues. During the 12 months through June, we conducted nearly 450 meetings with company directors or executives and a large number have committed to or are implementing positive change based on our feedback. During our conversations with company leaders, 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. Additionally, we continue to share our perspectives on best practices in governance and compensation, driven by our long-standing governance principles ("Our views on corporate governance at the companies in which we invest") and compensation principles ("Our views on executive compensation at the companies in which we invest").

Through our engagement program, we have observed numerous positive governance changes as well as improvements in compensation-related practices and disclosures. For example, through the extensive conversations with company officials prompted by Say on Pay proposals, we were able to better understand how firms intended to align pay with performance. Firms often learned from us the reasoning behind the funds' votes on particular proposals. Following many of these discussions, company officials committed themselves to adopting best practices or to more clearly explaining (or changing) seemingly poor pay practices. We also saw that after conversations with us (and presumably other large shareholders) companies granted shareholders the right to call special meetings and added provisions for majority voting in director elections.


We continue to be optimistic in our assessment of the governance of our U.S. portfolio companies. As most companies strive to improve their disclosure and we engage more company officials in discussions of best governance and compensation practices, we anticipate seeing steady, incremental improvement in governance. This was certainly true over the past year. The requirement for Say on Pay votes drove companies to improve both proxy statement disclosure and their level of engagement with shareholders. The result was a bit more clarity about compensation programs and greater efforts by boards to align pay with long-term performance. We expect this trend to persist as companies and investors continue to discuss what constitutes reasonable pay for performance.

We also are observing incremental increases in shareholder rights and continue to advocate for improvements through both our proxy voting and engagement with company officials. Examples of best practices include declassification of boards, implementation of majority-vote standards for director elections and other important matters, and establishment of parameters for shareholders' ability to call special meetings. We frame our discussions with management in the context of "Our views on corporate governance." We have followed up many of these discussions with communications regarding specific areas of concern, and we have been pleased with the receptiveness and responsiveness of company officials.

In all, we believe the funds' governance and proxy voting program reflects the fundamental purpose of Vanguard's proxy voting guidelines–to support those actions that maximize the value of each fund's investments in portfolio companies and, consequently, the value of shareholders' investments in the funds.

Summary of Proxy Votes Cast by Vanguard Funds for U.S. Companies From July 1, 2012, Through June 30, 2013

Board of Directors
Approx. # of Proposals For Against** Abstain
Elect directors
20,305 95% 5% 0%
Declassify board
80 100% 0% 0%
Adopt majority voting for directors (company proposal)
20 100% 0% 0%
Set/change board size
25 100% 0% 0%
Approx. # of Proposals For Against** Abstain
Ratify auditors
3,295 100% 0% 0%
Approx. # of Proposals For Against** Abstain
Company-sponsored advisory vote on compensation
2,655 96% 4% 0%
Company-sponsored advisory vote on severance
135 19% 81% 0%
Adopt/amend employee compensation plan
1,190 88% 12% 0%
Adopt/amend employee stock purchase plan
145 99% 1% 0%
Adopt/amend director compensation plan
60 89% 11% 0%
Other Corporate Proposals
Approx. # of Proposals For Against** Abstain
Approve capital structure change (e.g., authorize share issuance, approve a split or a reverse split)
385 74% 26% 0%
Adjourn meeting/transact other business
305 67% 33% 0%
Approve merger/acquisition/reorganization
200 99% 1% 0%
Amend charter/bylaws/articles of incorporation
85 88% 12% 0%
Reduce/remove supermajority voting requirement
40 100% 0% 0%
Approve name change
35 97% 3% 0%
Approve shareholder rights plan
25 89% 11% 0%
Approve shareholder right to call special meeting
15 100% 0% 0%
Shareholder Proposals***
Approx. # of Proposals For Against** Abstain
340 16% 83% 1%
Adopt/amend corporate/social/environmental policy
170 2% 45% 53%

* This report focuses only on proxy votes involving U.S. companies, which comprise approximately 75% of the funds' equity exposure as of June 30, 2013. The voting records we have posted with the SEC and on include the Vanguard funds' votes on proxy proposals from all the countries represented in our portfolios.

** In the case of director elections at companies without majority voting standards, this represents WITHHOLD votes.

*** The board typically recommends votes AGAINST shareholder proposals. As such, votes FOR shareholder proposals are generally against the board's recommendation. Likewise, votes AGAINST shareholder proposals are generally with the board's recommendation.