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Key updates to Wellington’s 2023 proxy voting guidelines

Bram Houtenbos, Governance Policy and Proxy Voting Manager
2024-02-29
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Following our annual review of Wellington’s Global Proxy Voting Guidelines, we have made a few notable changes. As always, the updated guidance is intended to help Wellington’s investment teams vote proxies in our clients’ best interests. As the name implies, our Guidelines are not intended to be rules that investors must abide by. Each investment team’s votes may align with their investment philosophy according to issues they deem material for their portfolios. The three key updates pertain to overboarding, climate disclosures, and shareholders’ right to call a special meeting.

Overboarding

Excessive director time commitments, or overboarding, can distract board members and cause oversight failures. We carefully consider this issue when voting proxies, balancing the benefits and risks of simultaneous commitments. While outside board service may help directors provide valuable perspectives to the companies they serve, extra workloads and stress can become liabilities, particularly in times of crisis. 

While each case is unique, we apply standards to assess potentially excessive commitments. We have generally considered executives with two external board positions overboarded, and nonexecutives with five total roles overboarded. For both executives and nonexecutives, starting from 2022, we double counted the roles of audit committee chair and compensation committee chair, given the substantial time commitments required to execute those duties. 

Based on new evidence and feedback gained during our many engagements last year, we are adjusting our overboarding approach ahead of the 2023 voting season, fine-tuning the approach in two major ways. First, we expect to be able to generally support executives taking on a single additional role, even when this involves chairing an audit committee. We may still exercise discretion where a combination involves two particularly demanding roles, such as a CEO assuming the role of chair at an external board, especially at a large, complex organization. 

Second, we are updating the roles considered for double counting in our overboarding matrix. We’re adding the board chair function and removing the role of compensation committee chair. Evidence indicates that executing the role of board chair requires the greatest time commitment and involves potentially more and varied workloads in times of stress, whereas the role of compensation committee chair is usually less time intensive, with more a predictable workload. We will continue to double count the role of audit committee chair.

Key change: Beginning in 2023, we expect to generally support executives’ service on one external board, even if the additional role involves chairing the audit or compensation committee. For nonexecutives, we will double count the roles of board chair and audit committee chair, but not compensation committee chair. We will still consider executives with three or more roles and nonexecutives with five or more roles overboarded. 

These changes reflect our desire to follow an evidence-based voting approach and engage with companies to support change when it aligns with our fiduciary duty. The update should result in fewer votes against management for overboarding. In general, we expect companies to improve disclosure on how they manage directors’ time commitments and detail how they aim to avoid directors becoming overextended.

Climate disclosures

As a firm, we aim to assess, monitor, and manage the potential effects of climate change on our investment processes and portfolios. Proxy voting is a key climate-risk management tool and part of our stewardship-escalation process.

At a minimum, we expect companies to disclose their Scopes 1 and 2 greenhouse gas (GHG) emissions,1 as investors need this information to understand transition-risk exposure. While no single metric captures this exposure, in general, the higher a company’s overall GHG emissions, the greater its transition risk. Calculating and reporting Scope 3 emissions remains challenging for companies in every sector, but Scopes 1 and 2 are quantifiable and comparable, with established measurement practices. For now, we will focus our voting on Scopes 1 and 2, while continuing to engage on Scope 3. 

As we communicated in last year’s guidelines, we reserve the right to vote against the reelection of board chairs at companies in the MSCI World Index, Climate Action 100+, and those assessed by the Transition Pathway Initiative (TPI) if: 

  • a company does not disclose Scopes 1 and 2 emissions
  • management has not committed to doing so in the coming year 
  • we believe emissions intensity is financially material

Recognizing that climate transition risks will affect companies in developed and emerging markets alike, and that more stringent disclosure standards are set to take effect around the world, we plan to expand our director-accountability stance to a broader range of companies over time.

Key change: Beginning in 2024, we will expand our GHG emissions voting approach to include directors at large-cap companies in emerging markets. Over the course of 2023, we plan to engage with those companies in scope to better understand their transition plans, ahead of the 2024 change.

Special meetings

Last year, shareholder proposals regarding the right to call a special meeting comprised a sizable portion of overall proposals at US companies. We believe this is an important shareholder right, as it helps to align management and shareholder interests and prevent excessively entrenched management teams. 

While we will continue to vote on a case-by-case basis, we plan to support proposals aimed at establishing this right at companies that lack it. We also expect to vote in favor of proposals aligned with what we consider fair representation. Where current ownership thresholds are 15% or higher, we will generally support lowering them; when a proposal calls for a minimum 10% ownership threshold, we will generally support that as well. In all cases, we consider the composition of a company’s shareholder base and management’s general responsiveness to shareholder concerns. We will continue to engage with companies on our views and expectations.

Key change: Starting in 2023, we will generally support proposals lowering the ownership threshold required to call a special meeting where the current level exceeds 15% and proposals calling for a 10% minimum threshold.



1
Scope 1 emissions are released during regular operations at sites directly controlled by the company, including the use of natural gas for heating, generators, and company vehicles. Scope 2 emissions are indirectly generated from electricity and heat used to power the company’s sites, so Scope 2 emissions depend upon the generation mix of the electricity grid at different sites. Scope 3 emissions are indirectly generated throughout the value chain, from upstream activities such as purchased goods and business travel and downstream activities such as the use of sold products.

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