Vanguard will increase scrutiny on companies that received diversity, equity and inclusion (DEI) shareholder proposals in 2021, according to the investor’s recent
Investment Stewardship Insight. Although Vanguard’s 2020 letter to issuers stopped short of threatening to vote against directors if companies did not take action on diversity, the investor clearly felt the weight of expectations that it speak out more definitively on its position regarding DEI proposals. The Insight addresses several types of DEI shareholder proposal, assessed against Vanguard’s stated priorities of “materiality and reasonableness.”
- DEI Disclosure. These highlight board diversity, workforce demographics, and policies and programs regarding gender/ethnic representation across the company. Vanguard views these as largely material and reasonable, but may not support them if the company is already providing disclosures or the request is too prescriptive.
- DEI Board Oversight. These request a report on the board’s oversight of the company’s DEI strategy and how well management is mitigating risks. Vanguard has said it will support these proposals unless the company is already sufficiently addressing the topic, similar to above.
- Third-Party Racial Audits. A newer trend this year was proposals requesting racial equity and civil rights audits (especially at financial services firms) to assess the company’s impact on under-represented communities. Vanguard is less sanguine on these proposals, noting that they are often “out of scope” if they demand for audits to cover all activities of a business and may be overly prescriptive and outside the bounds of a shareholder proposal. However, Vanguard may support these types of proposals if the board fails to show sufficient oversight of DEI risks.
Vanguard has stated that DEI risks, especially related to the board or workforce, may be financially material to all companies across all industries and affect long-term shareholder value. Therefore, the investor has provided recommendations to boards and management of its portfolio companies:
- Boards should establish “strong oversight” of company DEI strategy and provide disclosures of material risks.
- Boards should “educate themselves” on the latest thinking and challenge management on DEI issues; stated suggestions include forming a diverse advisory council and seeking input from diverse employees and customers outside of management.
- Boards should ensure management is communicating with the board and devoting sufficient resources to identifying and remediating risks and inequities.
The suggestions for boards are particularly interesting, as they imply a direct and assertive role for boards in the oversight of company DEI policy to an extent not seen previously. Vanguard’s recommendations for outside director education point to the fact that expertise in DEI issues is typically lacking on boards and may even be lacking in the board’s compensation consultant. Further, the question may arise of whether this significant additional responsibility should fall on the Compensation Committee (as it currently typically does) or whether a new committee should be established to work on these issues on behalf of the board.
