United States: How Many Directorships Is Too Many? Vanguard's Evolving View

Recently, Vanguard updated its Vanguard Fund proxy voting guidelines, disclosing a proxy voting policy relating to what Vanguard considers to be overboarded directors, based on the evolving role of directors and its assessment of the time and energy required to effectively fulfill director responsibilities. 

Effective for this proxy season, Vanguard will generally vote against named executive officers that sit on more than one outside public company board (for a total of two public company boards), except at the company at which he or she is an executive officer.  In addition, for non-executive directors, Vanguard will vote against directors who sit on more than four total public company boards, except that the no-vote will generally not extend to the director where he or she is the chair of the board.  Vanguard may, on a case-by-case basis, cast its vote for an otherwise overboarded director if there is a public commitment to stepping down from a sufficient number of boards that would fall within the proxy voting guidelines.

Conversations regarding overboarding and what constitutes the appropriate maximum number of boards is not a recent trend.  Vanguard has weighed in on the topic in the past.  In 2018, Bloomberg reported that, despite not having a current policy, if Vanguard believes a director is unengaged or not acting in the best interests of the stockholders, it will raise the concerns to the board.  Presumably, like other areas of investor concern, a lack of company responsiveness risked a no-vote for that director.

In late 2016 ISS and Glass Lewis both revised their proxy voting guidelines to address overboarding concerns.  However, the revised Vanguard policy goes further than both ISS and Glass Lewis.  Under ISS guidelines, a CEO is limited to serving on not more than two public company boards besides the company at which he or she is a CEO (for a total of three public company boards).  The policy does not address other executive officers.  Non-executive directors may serve on up to five public company boards in total.  Glass Lewis takes a similar view with respect to executive officers as the new Vanguard guidelines and recommends a vote against an executive officer who sits on more than two public company boards, but permits non-executive directors to sit on up to five public company boards.

Vanguard's guidelines are similar to the BlackRock proxy voting guidelines, which were amended in 2018 to reduce the number of outside public company boards for a CEO from two to one (for a total of two public company boards).  There was no change to the four total public company board limit for non-executive directors.  By contrast, State Street may withhold votes where a director is the CEO of a public company and sits on more than three public company boards and where non-executive directors sit on more than six public company boards.

The revised Vanguard proxy voting guidelines were released in the middle of the 2019 proxy season, at a point when a significant number of companies have already held their nominating and governance meetings related to the annual meeting, vetted and selected their director candidates and filed proxy statements for their 2019 annual shareholder meetings.  For the 2019 proxy season, proxy advisor Georgeson identified 230 executive officers and 142 non-executive directors that are likely to be affected by Vanguard's revised voting policies.  Given that Vanguard and BlackRock routinely own approximately 10% of the shares in the aggregate of any U.S. public company, the impact on director election results for directors that exceed the number of acceptable public company boards under both Vanguard and BlackRock's policies may be significant.

One of the important aspects of Vanguard's overboarding policy is its explicit statement that it will take into account public commitments by directors to step down.  Therefore, if a director finds him/herself a potential candidate for a no-vote, the director should consider whether he or she intends to step down from any of the public company boards on which he or she serves and ensure that such plans are adequately communicated and disclosed.  Similarly, if there are other factors that Vanguard should consider, engagement by the affected companies may be warranted.  In addition to changes to their voting guidelines, Vanguard also separately reiterated that companies are encouraged to discuss their governance practices more generally with Vanguard.  Director skills, experience and the director selection process are areas on which Vanguard is particularly focused.

In the future, competition for qualified, experienced directors is likely to increase and certain industries are likely to be disproportionately affected.  And while the proponents of these changes highlight the need to address the greater demands placed upon a director's time today, it seems inevitable that these changes (at least in the short-term) will add additional pressure to the director recruiting market.  What impact these changes may have on the composition and diversity of boards of U.S. public companies going forward remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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