2019 Investment Stewardship
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Investment Stewardship 2019 in focus: Europe In focus: Europe Vanguard funds own shares in nearly 13,000 public companies around the world. In the 12 months ended 30 June 2019, the Vanguard funds voted 32,930 proposals at 2,369 meetings for European-based companies across all major sectors. In addition, we emphasised our engagement efforts in this region and engaged with 141 European companies. While we recognise regional market variations, our approach remains consistent globally. 2019 highlights 141 $183 billion 47% Companies engaged Total engaged equity Of European equity assets under management AUM engaged Regional trend: Governance matters emphasised across the continent We saw increased interest in corporate governance and investment stewardship matters from portfolio companies, clients, regulators, journalists and other key stakeholders. Our approach to this heightened interest was a focus on advocacy and direct dialogue with companies’ board members and management. Vanguard advocated for better corporate governance practices at the market level, including through responses to regulators for commentary on various matters, such as proposed revisions to the German Corporate Governance Code. In that case, we shared our perspective on a number of revisions that we believe would improve accountability and governance best practices in Germany. For example, we supported shorter term lengths for Supervisory Board members and increased disclosure in company annual reports about members’ attendance at Supervisory Board meetings. In the United Kingdom, Vanguard advocated for strong stewardship practices in responses to the Financial Reporting Council’s revised UK Stewardship Code and the Financial Conduct Authority’s discussion paper on stewardship. Both the revised code and the paper remained under review by policymakers at the time this report was published. Another topic of industry interest in recent years has been sustainability, with an eye towards driving long-term performance. In the regulatory sphere, the focus on sustainability accelerated in Europe, through policymaking initiatives such as the European Commission’s proposed sustainable finance policy proposals. These proposals, which Vanguard has engaged on, seek to further integrate environmental, social and governance (ESG) factors into the financial markets. Corporate governance and sustainability matters were also frequently in the spotlight this year at European industry events and roundtables. Vanguard was active in these discussions and spoke at numerous conferences. Highlights included meeting with groups of corporate secretaries in the UK and addressing investor relations professionals in Germany and Switzerland. b Investment Stewardship at a glance Spotlight: Executive remuneration Pay is scrutinised across Europe Vanguard believes that executive remuneration policies should emphasise and incentivise long-term performance. We seek to ensure against any inverse relationship whereby executive remuneration increases as a company underperforms or executive pay doesn’t align with that of industry peers. We advocate for this view in direct discussions with remuneration committee members, at industry events and in response to regulatory and policy In focus: Europe consultations. In discussions with committee members, we seek to understand their approach to determining pay structure and metrics, including how these elements connect to the company’s strategy and long- term shareholder value creation. We look for comprehensive and clear disclosure that enables us to understand how the committee determines pay outcomes. We’ve seen increased scrutiny of pay this year in the UK, particularly regarding the challenging nature of remuneration performance targets and the appropriate level of pay for executives. This is the result of heightened market volatility in Europe caused by, among other factors, geopolitical dynamics such as Brexit. The prospect of the UK leaving the European Union has raised questions about the impact of such an event on financial markets, trade, and businesses. Looking ahead to 2020, companies’ implementation of the UK Corporate Governance Code will be a key focus for our European team, including monitoring relevant changes to executive remuneration practices. In this first year of implementation, Vanguard saw companies make policy changes that require executives to hold their shares after leaving a company and that reduce executives’ pension contributions to align with those of the wider workforce. With the European Shareholder Rights Directive II (SRD II) now in effect, we also expect increased attention to executive pay across the continent. Among other provisions, SRD II requires that companies provide shareholders a vote on both remuneration policies and reports at the annual meeting. The objective is to build a greater link between company performance and executive pay and to increase transparency about how companies determine the value of executive rewards. This broadly aligns with Vanguard’s approach to executive remuneration. Currently, companies in many European markets (such as Germany) are not required to seek shareholder approval for remuneration reports or policies, although some choose to do so when they are making changes. In the UK, shareholders vote on both a binding resolution reflecting a company’s remuneration policy and an advisory resolution reflecting its remuneration report. Vanguard expects that European companies will adopt similar “say on pay” votes as SRD II is implemented. We are encouraged by the increased transparency brought about by the directive, which we believe will serve as a catalyst for strengthening best practices across the continent. c Proxy voting history Summary of proxy votes cast by Vanguard funds for companies in Europe* (1 July 2018–30 June 2019) 10% of equity AUM | 2,369 meetings 2018 2019 Alignment with our Number of Number of principles Proposal type proposals % for proposals % for Board Management proposals composition Elect directors 9,976 89% 9,825 88% Other board-related 4,247 96% 4,039 96% Shareholder proposals Board-related 289 53% 295 59% Oversight of Management proposals strategy and Approve auditors 2,492 98% 2,501 98% risk Shareholder proposals Environmental/social 13 0% 21 10% Executive Management proposals remuneration Executive remuneration 2,384 91% 2,229 89% Other remuneration-related 2,129 94% 2,080 93% Shareholder proposals Remuneration-related 4 0% 26 31% Governance Management proposals structures Governance-related 1,186 95% 1,021 95% Shareholder proposals Governance-related 20 40% 34 15% Other Management proposals proposals Capitalization 6,624 97% 6,408 98% Mergers and acquisitions 325 96% 306 91% Adjourn/other business 4,139 96% 4,095 96% Shareholder proposals Other 49 14% 50 16% Total 33,877 93% 32,930 93% *Note: The funds’ voting in Europe encompasses these markets: Austria, Belgium, Cyprus, Czech Republic, Denmark, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Ireland, Isle of Man, Italy, Jersey, Liechtenstein, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Sweden, Switzerland, United Kingdom, and Virgin Islands. Company engagements The following table lists the 141 companies that Vanguard’s Investment Stewardship team engaged with in Europe during the 12 months ended 30 June 2019. A bullet (•) indicates a primary topic of the engagement. However, these are open dialogues and can cover a wide range of issues over multiple discussions. Secondary topics often come up. For context, board composition discussions can cover topics such as board independence, tenure, and diversity. When we discuss oversight of strategy and risk, we want to know whether the board understands how the company will remain relevant over the long term in the context of all relevant risks. Our discussions on executive remuneration look at pay in comparison with relevant peers and its linkage to long-term performance benchmarks. Our meetings about governance structures focus on companies’ provisions that support—or limit—shareholders’ ability to effect change over time through their voice or their vote. Austria IMMOFINANZ AG • • Wienerberger AG • • • Belgium Anheuser-Busch InBev SA/NV • • Denmark Danske Bank A/S • • France Accor SA • • • Air Liquide SA • • • Airbus SE • • • Atos SE • • • BNP Paribas SA • • • Bureau Veritas SA • Carrefour SA • • • • Danone SA • • Mercialys SA • • Orange SA • • Pernod Ricard SA • • • Publicis Groupe SA • • Sanofi • • • Schneider Electric SE • • Technicolor SA • • Total SA • • Veolia Environnement SA • • Germany Aroundtown SA • • • BASF SE • • Bayer AG • • • • Bayerische Motoren Werke AG • Commerzbank AG • • Daimler AG • • • Delivery Hero SE • Deutsche Bank AG • • • • Deutsche Boerse AG • • • Deutsche Post AG • Deutsche Telekom AG • • • Germany Deutsche Wohnen SE • • E.ON SE • • Oversight of Board strategy Executive Governance Market Company name compensation and risk remuneration structures Henkel AG & Co. KGaA • • Muenchener Rueckversicherungs- • • Gesellschaft AG in Muenchen ProSiebenSat.1 Media SE • SAP SE • • • • Volkswagen AG • • • Vonovia SE • • • Greece Ellaktor SA • • Italy Ferrari NV • • Poste Italiane SPA • Telecom Italia SpA/Milano • • Netherlands ASML Holding NV • • ING Groep NV • • Koninklijke DSM NV • • • • Koninklijke Philips NV • • • Russia MMC Norilsk Nickel PJSC • • • Spain Banco Bilbao Vizcaya Argentaria SA • • • Banco Santander SA • • Iberdrola SA • • Repsol SA • • Telefonica SA •