Illustrator Dennis Balogh

William McNabb

What do today’s shareholders want most?

It was September 2008. As the economic meltdown was growing worse, The Vanguard Group sent a salvo to CEOs of its 900 largest holdings: a single-page document called “Our Views on Corporate Governance” — also known as the principles letter. One of the world’s largest institutional investors was laying out what its active managers want to see when investing in a company. “You could argue that these are principles that a good investor should have been living by before the crisis, but there’s an even bigger emphasis today,” explains Chairman and CEO William McNabb.

Vanguard’s six key principles include independent oversight of the board, accountability to shareholders (enhanced by annual board elections), engagement (or regular dialogues) with shareholders, sensible compensation tied to performance, shareholder voting rights consistent with economic interests (one class of shares), and minimal anti-takeover devices. Although it’s no guarantee, companies that follow those principles have a better shot at meeting earnings targets, says McNabb, 52. “We see an increasing awareness by investors that a lot of companies can have the right strategy, but if they don’t execute well, it doesn’t really matter,” he notes. “And when we can check the box on these governance items, we have more confidence that the management team is on the right track.”

McNabb says most of the principles relate to transparency, which is increasingly important to investors. “Shareholders are looking for CEOs to have an increased focus on clarity; they want to be able to understand the numbers and put them into perspective,” he says. “The less clarity around off-balance-sheet activity, the higher the hurdle rate for the investment manager to get comfortable with what’s going on at a company.” — Sharon Kahn