27 Nov. 2017 | Comments (0)
On Governance is a new series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.
America’s most influential investor wants companies to engage more
BlackRock, with more than $5 trillion of assets under management, is the world’s largest institutional investor. It appears at the top of the share register of listed companies around the world. One of the most important questions corporations are asking in anticipation of the 2018 annual meeting season is: “What is the significance of having BlackRock as our largest shareholder and how should we deal with them?”
To answer this question, I interviewed two of BlackRock’s key decision-makers: Michelle Edkins, managing director, global head of BlackRock Investment Stewardship; and Zach Oleksiuk, head of Americas, BlackRock Investment Stewardship. (This blog post is derived from a November 1, 2017 Morrow Sodali report.)
Here are some key points from the report:
Edkins opened the conversation with a definitive statement about BlackRock:
“As indexed investors, we are patient long-term capital. We operate at scale. Our focus is heavily on governance and board oversight. We do not react to short-term earnings and we do not practice corporate governance box-ticking.”
This statement contains several important messages for portfolio companies:
- First, it confirms that BlackRock expects to be treated as a long-term owner, not as a trader, activist, or market opportunist. BlackRock sees itself as a de facto “permanent” shareholder of the companies in the indexes they track.
- Second, the BlackRock stewardship team gives priority to portfolio companies’ policies relating to ESG – the environment, corporate social responsibility (CSR), governance and board function.
- Third, because BlackRock is a self-described “fiduciary investor,” the stewardship team’s policies and actions are taken with a view toward protecting the underlying interests of the beneficial owners whose assets BlackRock has been entrusted to manage.
- Fourth, indexing (often referred to as “passive investing”) does not mean that BlackRock takes a passive approach to proxy voting or that voting decisions are outsourced to proxy advisory firms. On the contrary, the BlackRock team sees proxy voting as a power they must exercise with fiduciary care.
- Finally, Edkin’s statement reveals why “stewardship” has become the term favored by BlackRock and other major institutional investors. It describes an oversight process that integrates financial and investment analysis with oversight of the governance, societal, environmental and sustainability practices of portfolio companies.
Edkins and Oleksiuk addressed the three pillars that support their team’s stewardship of portfolio companies: engagement, access to directors and disclosure.
Based on discussion with the BlackRock team, here are some thoughts about how effective engagement programs should work.
- Do it now. Surprisingly, Edkins stated categorically that she would like to see every portfolio company get in touch with the BlackRock team by email at least once a year. She calls this “engagement light.” An engagement-light knock on the door is one of the best ways for a company to initiate and maintain a relationship with BlackRock. She pleaded for engagement unrelated to voting not to be initiated during the annual meeting season, when her team is fully focused on analysis and dialogue to inform voting decisions.
- Be prepared. The BlackRock team will initiate engagements on its own when conditions warrant. These initiatives occur most commonly when companies have failed to satisfy BlackRock’s informational needs. Even in these cases, the ensuing discussions with BlackRock will be more credible and constructive if a pattern of engagement is already in place.
- Follow up. When engagement meetings do occur, whether initiated by the company or by BlackRock, Edkins and Oleksiuk emphasize that “there has to be a clear and anticipated outcome.” In other words, engagements should have an objective, a timetable, key performance indicators and either a resolution or an explanation of why the expected outcome has not been achieved.
- Don’t let an activist or crisis set the agenda. The BlackRock team advises companies not to wait for an activist or crisis to trigger a substantive engagement about business strategy. In Edkins’ words, “It doesn’t make sense for companies to put themselves on the defensive. Companies are expected to do their own continuous self-examination and monitoring of business strategy, performance goals, governance and risk factors. Strategic questions are basic to managing a business. If these issues are addressed only in response to an activist, investors are likely to conclude that the business isn’t being run effectively.”
- Talk to shareholders before agreeing to settlement with an activist. The BlackRock team wants companies targeted by activists to engage directly with shareholders. According to Edkins and Oleksiuk, there is a real concern among indexed investors that standard negotiated settlements -- such as giving board seats to a dissident or announcing a stock buyback – favor short-term gains at the expense of long-term performance. They urge target companies and their boards to engage with shareholders directly, listen to their views and disclose their own detailed strategic plan to create value over the long term. This approach will enable the BlackRock team to evaluate both sides and make an informed decision on the merits.
2. Access to Directors
Access to directors is a sine qua non for companies that want to engage substantively with BlackRock. Edkins and Oleksiuk expect to be able to meet and engage directly with their elected representatives in the boardroom.
Here are some of BlackRock’s suggestions for boards to take an active role in shareholder engagement programs.
- Review your company disclosures relating to board composition. A complaint heard often from institutional investors, including BlackRock, is that they are asked to vote for directors without having sufficient information to make an informed judgment about their skills, experience and the process by which they were selected. The BlackRock team wants companies to provide more detailed and qualitative information about board members on their web site and in annual meeting materials.
- Educate your board members about shareholder expectations. Board members should receive periodic reports from the corporate secretary, the investor relations team and outside experts that provide data and information about the company’s shareholder profile, ownership changes, market activity, buy-side and sell-side reports, media coverage and feedback from investor relations and governance roadshows. The directors should be briefed on intelligence from proxy solicitations, investor engagement campaigns and voting results at the annual meeting. In addition to this internal data, board members should have access to professional education programs and should be briefed periodically by experts on ESG issues and risk factors such as technology and cybersecurity that are high on the list of shareholder concerns.
The Blackrock Investment Stewardship Engagement Priorities for 2017-2018, published earlier this year, state:
“In our view, companies that report only to meet the regulatory disclosure requirements are missing a prime opportunity to more comprehensively engage new and existing investors about how effectively a business is led and managed.”
We discussed several ways that boards might consider moving beyond compliance with regulatory disclosure and “tell their story” holistically and substantively:
Companies could add more detail to the Management’s Discussion and Analysis (MD&A) section of the annual report to include a narrative summarizing the board’s responsibilities and explaining how board “oversight” works in practice, how management implements board policies through internal controls and how board actions supported strategy during the past year. Former SEC Chair Elisse Walter stated in a recent article, “SEC regulations set the stage, telling companies what, at a minimum, should be covered, but it’s up to the company to make sure the story gets told. That’s where the MD&A becomes a real opportunity for the company to tell shareholders what’s going on.”
When ESG and sustainability reports are published separately, companies could include an introduction or commentary from the board of directors to demonstrate that the policies are linked to business strategy. Walter also comments on this topic: “. . . sustainability factors increasingly impact the financial condition and operating performance of companies. As such, these factors have a heightened potential to be material to investment decisions.” And she says further, “. . . sustainability issues are business issues.” And finally, “In my view, companies should address investors like they are business partners. . ..”
Companies could include in the proxy statement a letter to shareholders from the board, the board chair or the lead director discussing the board’s activities and decisions during the year. In some cases, a board letter could focus on a relevant topical issue – Say on Pay, succession planning, access to shareholders, changes in board composition.
Companies could expand the scope of the annual board evaluation process to address ESG topics and to consider the board’s performance from the perspective of shareholders and other important constituencies. A board evaluation report reflecting this approach could include substantive commentary explaining how the board’s actions serve the interests of these constituents.
Over the long term, companies and boards could consider whether it would be appropriate to publish an annual Director’s Discussion & Analysis (either published separately or as a section of the MD&A in the annual report) that would provide shareholders with greater transparency about issues for which the board has primary responsibility.
Think like an indexed investor.
BlackRock sees itself as a provider of patient long-term capital, a permanent shareholder. It prefers private negotiation over public action. It is willing to evaluate portfolio companies individually case-by-case, on the merits rather than by one-size-fits-all standards. The price of these stabilizing attributes is a set of demands for significant change in the behavior of companies. BlackRock expects companies to engage openly, it wants direct access to board members, it wants a transparent rather than a cloistered boardroom and it wants companies to tell their story in a comprehensive holistic narrative.
For companies willing to meet the BlackRock challenge, the three stewardship pillars provide a blueprint for how to get along with BlackRock.
Engagement – establish and maintain a relationship before a crisis arises
Access – open the boardroom door (just to let directors out, not to bring shareholders in)
Disclosure – open the boardroom windows and tell the company’s whole story.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.
Elisse Walter, Sustainability Disclosure, IRUpdate, September 2017, pp. 15-16.