Glenn Booraem is a principal of the Vanguard Group, Inc. and the treasurer of each of the Vanguard Funds. He has worked for Vanguard since 1989, where he currently oversees the firm’s corporate governance program covering approximately $2 trillion in equity market value. He is a periodic speaker on governance to industry groups, and has served on the New York Stock Exchange’s Proxy Working Group and Commission on Corporate Governance. Most recently, Glenn served on the advisory board on corporate/investor engagement for The Conference Board Governance Center and the working group for the SDX (Shareholder/Director Exchange) Protocol. He has been recognized for the past 5 years (2011-2015) on the NACD’s Directorship 100 list of the “most influential people in corporate governance.” In addition to his governance-related duties, Glenn is responsible for global fund accounting operations, security valuation and fund compliance monitoring for the Vanguard funds. Glenn earned a BBA from Temple University, and he is a graduate of the Advanced Management Program at Harvard Business School.
In the past few years, investors have become much more attuned not only to what happens in the boardroom, but also to who is making it happen. They recognize that the building blocks for a high-performing board are the right mix of people.
Access to information on board members and potential director candidates is increasing, whether that is brought to light by a shareholder activist campaign scrutinizing board performance or the company itself disclosing more about directors in annual filings. Overall, increased transparency on board composition has generated deeper interest in the topic from all investors—not just activists—as well as other governance professionals, observers and the general public.
C-Suite had the opportunity to speak with Glenn Booraem, Principal at Vanguard, regarding the investors’ perspective on this hot-button issue. He had recently joined Equilar for a webinar on the subject, and in responding to questions from the attendees, Booraem explored why board composition and recruiting are critically important for directors to address with shareholders.
Glenn Booraem: We view the composition of the board (and its resulting performance) as perhaps the single most important governance issue for investors. Ensuring that the team of people who assemble in the boardroom brings to bear a complement of skills, experience and background that are well-suited to the company’s strategy is a key objective of ours.
We believe as a fundamental matter that well-governed companies will perform better over the long term. From this perspective, all roads lead to and through the board. So if we have the right people on the board today, and the right process to assess and evolve the board’s composition over time, we believe, as a general matter, that good things will follow.
Booraem: As I mentioned, we view board composition as THE governance issue. So our focus on who represents our interests on the board isn’t necessarily driven by concern with who serves in that capacity today. Rather, it acknowledges the special nature of the board as a self-perpetuating body that, absent shareholder intervention, gets to choose its own successors. Ensuring that this process is rigorous and reflective of the company’s strategy for creating long-term value is central to our focus on the board. Corporate governance is, at its core, about creating a structured environment of accountability for long-term outcomes. We want to ensure that this accountability exists for the board primarily as a safety net, in the event that the majority of shareowners—the providers of capital—identify a need to effect change.
Booraem: Automatic tenure-limiting mechanisms, such as mandatory retirement ages and term limits, are blunt instruments to effect board refreshment. While they may serve as one component of the board’s process for evolving its composition over time, we believe that underpinning the process of board evolution must be a rigorous periodic assessment of the board’s needs, capabilities and performance. First and foremost, we want to ensure that the board, viewed as an amalgam of what each director brings to the table and how they function as a team, is “fit for purpose” in the context of the company’s strategic direction. Changes in the board’s composition should be expected over time as a natural consequence of updating and evolving the board’s capabilities in response to changes in the industry, the markets and/or the company’s strategy.
Corporate governance is, at its core, about creating a structured environment of accountability for long-term outcomes.
Booraem: We have seen that, over time, best governance practices tend to be adopted more rapidly by larger capitalization firms. Structural governance provisions such as declassified boards, majority voting for directors and most recently, proxy access, are all more prevalent among larger capitalization companies. Gender diversity on the board is also following this pattern. Based on Equilar data, while about 21% of S&P 500 directors are women, approximately 15% of Russell 3000 directors are women. Further, 738 Russell 3000 boards had no female members in 2016, while only seven S&P 500 boards were all-male.
We believe good governance is important for companies of all sizes; the most significant companies to our small cap funds—both indexed and active—are, you guessed it, small companies. Investors in these funds, with ultimate, albeit indirect, exposure to these smaller companies have an interest in the same good governance practices as those prevalent at largest firms. Smaller firms shouldn’t get a “pass” simply because they’re small. That said, we want to work with companies to understand what they’re doing to move in the direction of best practices and hold them accountable through engagement for making adequate progress.
Booraem: We want insight into the process the board utilizes to evaluate the qualifications and performance of directors (both individually and as a team) in the context of the company’s strategic needs. We want to understand the alignment between directors’ skills, background and experience and the board’s requirements—given, among other things, the company’s strategy, the industries in which is competes, its maturity as a firm, and the most significant risks it faces. Too often, the focus of discussion of board evaluations centers on getting quote-on-quote bad directors off the board. And while that may be the outcome in a small number of cases, we believe that the far more powerful outcome of a rigorous, ongoing evaluation process is getting the right directors onto the board through the identification of emerging needs.