As discussed in this PubCo post, BlackRock has recently issued its 2018 Proxy Voting Guidelines for U.S. Securities. Because BlackRock is reportedly the largest asset management firm (with $6.3 trillion under management), its voting guidelines will matter to more than a few companies. And BlackRock takes its proxy voting seriously. With the growth in index investing, CEO Laurence Fink has argued, asset managers’ responsibilities of engagement and advocacy have increased, given that asset managers cannot simply sell the shares of companies about which they have doubts if those companies are included in index funds.
The new guidelines are divided into seven topics: boards and directors; auditors and audit-related issues; capital structure; mergers, asset sales and other special transactions; executive compensation, environmental and social issues and general corporate governance matters.
Boards and directors
While generally supportive of board nominees, BlackRock has exceptions:
- BlackRock expects a majority of directors and all major committee members to be independent, but its definition of independence may vary from listing standards. For example, BlackRock considers personal relationships with the company or its senior executives to be an impediment to independence.
- Accounting irregularities or failures of audit oversight could earn negative votes for audit committee members, and excessive comp relative to peers could earn negative votes for comp committee members.
- BlackRock may vote against a director that appears to have “acted (at the company or at other companies) in a manner that compromises his or her reliability in representing the best long-term economic interests of shareholders.”
- Poor attendance records (less than 75% of meetings) and overboarding are also problematic. For example, BlackRock believes a public company CEO should serve on no more than one additional board. Non-CEOs can sit on up to four boards.
Bloomberg BNA reports that “concern for overboarding was the top reason BlackRock voted against directors at companies in the Russell 3000 index in 2016, according to the most recent data available from researcher Proxy Insight.” In the article, the global head of BlackRock’s investment stewardship team observed that “‘it’s a reflection more generally that responsibilities on board members continue to increase and we want to make sure that for CEOs, being an outside board member never detracts from their CEO role.” According to the article, a recent study by executive comp data firm Equilar “found that shareholders at S&P 500 companies saw lower returns when the CEO sat on more than one other company’s board.’” The article reports that asset manager Vanguard does not address overboarding in its voting guidelines, and that, while asset manager State Street has not yet updated its guidelines for this proxy season, it indicated that a director should sit on no more than three total public company boards if he or she is a CEO and no more than six boards for non-CEOs.
- Relevant directors may receive a negative vote if BlackRock believes that shareholder concerns have not been substantially addressed (such as failure to implement shareholder proposals that affect shareholder rights or economic interests and that received majority favorable votes or failure to address over 30% withhold votes for any director), or there is evidence of entrenchment or inadequate succession planning.
- Negative votes may be cast against appropriate directors where there is a failure to uphold best governance practices, such as approval of a pill, repricing of options or amendments to governing documents that reduce shareholder rights without shareholder approval.
- Directors should have diverse experience and competencies to effectively oversee the company’s long-term strategy. As discussed in this PubCo post, BlackRock expects to see at least two women on each board. Note that, in the past, BlackRock has frequently put its vote where its mouth is, having voted in favor of a number of proposals for board diversity (see this PubCo post); in its Investment Stewardship Report for Q2 2017, BlackRock indicated that, in the second quarter, it supported eight out of nine shareholder proposals that requested the adoption of a policy on board diversity or disclosure around plans to increase board diversity.
- BlackRock typically supports proposals for board declassification and majority voting for directors (unless there is a sufficiently robust alternative).
- With regard to board oversight of risk, BlackRock advocates having an established process for “identifying, monitoring and managing key risks,” which provides for access to outside advice for independent directors. Transparency around risk is important, with particular focus on “how risk oversight processes evolve in response to changes in corporate strategy and/ or shifts in the business and related risk environment.”
- BlackRock generally defers to the board on the question of having an independent board chair, but, if there is a combined CEO/chair, supports designation of a lead independent director with appropriate authority (which is depicted in a table in the guidelines).
Auditors and audit-related issues
- BlackRock may withhold votes from audit committee members where the board has failed to facilitate quality, independent auditing. It takes “particular note of cases involving significant financial restatements or material weakness disclosures, and [it expects] timely disclosure and remediation of accounting irregularities.” BlackRock may support shareholder proposals for auditor independence or audit firm rotation if consistent with its views.
Capital structure proposals
- BlackRock frequently opposes proposals for blank check preferred because it could be used as an entrenchment device, but may support a proposal where the company appears to have a legitimate motive and commits not to use the shares for anti-takeover purposes or where the proposal is merely for an increase for greater financing flexibility.
- BlackRock advocates voting rights in proportion to economic interests. It believes that companies with (or adding) dual- or multi-class share structures should seek periodic shareholder approval, giving unaffiliated shareholders the opportunity to affirm the current structure or establish phase-out mechanisms.
- BlackRock generally supports company proposals to add shares, including preferred stock with designated rights, as well as stock splits (including reverse splits that do not negatively affect share value).
Mergers, asset sales and other special transactions
- In determining its vote, BlackRock considers factors such as premiums, comparable transactions, transaction rationale, unanimity of board approval and arm’s-length negotiations, board or management financial interests, and fairness opinions.
- BlackRock opposes most proposals for poison pills and votes in favor of shareholder proposals to rescind pills. However, it may support pills that include a reasonable “qualifying offer clause,” which requires shareholder ratification and a sunset provision, and provides that it is not triggered by certain all-cash offers. It may also support pills that are “the only effective method for protecting tax or other economic benefits that may be associated with limiting the ownership changes of individual shareholders.”
- BlackRock generally opposes shareholder proposals to reimburse proxy contest expenses, even where it may have supported the campaign.
- BlackRock typically opposes shareholder proposals on issues that are adequately addressed by company policy or that company history suggests are not likely to be problems for the company.
- A lengthy appendix to the guidelines describes BlackRock’s approach to say on pay.
- BlackRock generally supports triennial say-on-frequency votes, but may support annual frequencies in cases where pay is not aligned with performance. Although, interestingly, note that, in BlackRock Inc.’s own say-on-frequency proposal, management recommended annual say-on-pay votes.
- BlackRock typically supports shareholder proposals for clawbacks and favors recoupment from senior executives whose compensation was based on faulty financial reporting or deceptive business practices, or whose “behavior caused direct financial harm to shareholders, reputational risk to the company or resulted in a criminal investigation, even if such actions did not ultimately result in a material restatement of past results.”
- BlackRock typically favors employee stock purchase plans and supports equity plans that align the interests of the board, management and employees with those of shareholders. BlackRock may support shareholder proposals prohibiting (and believes boards should prohibit) use of shares as loan collateral, in margin accounts and in hedging or derivative transactions. BlackRock generally evaluates equity plans relative to peers and performance. It opposes evergreen provisions, repricing without shareholder approval and acceleration of vesting unless triggered by both a change in control and termination of the employee.
- BlackRock typically supports golden parachute proposals unless payments are excessive or detrimental to shareholders, taking into account factors such as peer packages, management performance, inclusion of excessive excise tax gross-ups, percentage of premium or transaction value transferred to management and not shareholders, whether management attempted to maximize shareholder value and other factors. BlackRock may support shareholder proposals advocating shareholder approval of parachutes and proposals requiring shareholder approval of plans that exceed 2.99 times an executive’s current salary and bonus, including equity compensation.
- BlackRock evaluates option exchanges on a case-by-case basis, taking into account factors such as the cause of the stock price decline (macroeconomic or company-related), exclusion of directors and executives, value neutrality of the exchanges, and evidence that, absent a repricing, the company would suffer retention and recruiting issues.
- BlackRock may support shareholder proposals to submit SERPs to a shareholder vote if benefits are excessive relative to employee plans.
Environmental and social issues
- BlackRock expects companies “to identify and report on the material, business-specific E&S risks and opportunities and to explain how these are managed,” including how the approach taken by the company best serves the interests of shareholders and enhances long-term economic value, as well as key performance indicators, peer group benchmarking and verification processes in place.
- Where BlackRock has concerns, it may vote against directors or support shareholder proposals on this issue, taking into consideration whether the company has taken steps to address the concern and implement a response, as well as any near-term economic disadvantage to the company related to the issue. More often, however, BlackRock will address these issues through direct engagement.
In BlackRock CEO Laurence Fink’s annual letter to public companies this year, he advocated that companies recognize their responsibilities to stakeholders beyond just shareholders—to employees, customers and communities. That means that, among other things, a company should consider its role in the community, its management of its environmental impact, its efforts to create a diverse workforce, its ability to adapt to technological change and take advantage of new opportunities, its retraining programs for employees in an increasingly automated world and its efforts to help prepare workers for retirement. Although each “company’s strategy must articulate a path to achieve financial performance,” critically, Fink advocates that, to sustain a company’s financial performance, the company “must also understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change—affect your potential for growth.” In effect, Fink is arguing that attention to corporate social responsibility is inherently linked to and inseparable from sustainable financial performance. (See this PubCo post.)
- BlackRock believes that “climate presents significant investment risks and opportunities to many companies” and expects “companies to help their investors understand how the company may be impacted by climate change, in the context of its ability to realize a long-term strategy and generate value over time.” In the event of a shareholder proposal related to climate issues, BlackRock will take into account the robustness of company disclosures and the company’s management of these issues.
Last proxy season, three climate-change proposals received majority votes, likely attributable to favorable votes from BlackRock and other institutions, which reportedly switched sides for the first time, after years of limiting their actions to just cajoling. In one case, Bloomberg BNA reported that BlackRock, which owned 7.8% of the shares, voted in favor “due to the ‘lack of response’ on the issue by the company and a lack of improvement in its climate-change related reporting following a similar proposal in 2016 that received more than 40 percent support. This year’s vote marks the first time BlackRock has supported a climate-change related shareholder proposal….” In another case, it was reported that the favorable vote was likely largely attributable to shifts from past positions on this issue by BlackRock and Vanguard, which together held 13% of the shares. As BlackRock has stated in discussing its Investment Stewardship priorities for 2017-2018, “[a]s a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite — when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations.” (See this PubCo post and this PubCo post.)
- BlackRock believes that companies that engage in political activities “should develop and maintain robust processes to guide these activities and to mitigate risks, including a level of board oversight.” BlackRock does not generally support any proposals requesting shareholder votes on political activities or expenditures or proposals related to corporate disclosure of political activity if they are overly prescriptive, but may support proposals requesting additional disclosure “where there seems to be either a significant potential threat or actual harm to shareholders’ interests and where [it believes] the company has not already provided shareholders with sufficient information to assess the company’s management of the risk.”
General corporate governance matters
- BlackRock generally supports proposals
- to adjourn meetings to solicit additional votes,
- for exclusive forums for litigation (but will vote against certain directors if adopted unilaterally and BlackRock considers the provision adverse to shareholders),
- that are market-standard proxy access proposals (3%/3-year/ greater of 2 or 20% of the board),
- for written consent by shareholders, unless structured to benefit a dominant shareholder or if the company already provides shareholders with the right to call special meetings,
- giving shareholders holding between 15% and 25% the right to call special meetings, unless structured to benefit a dominant shareholder, and
- simple majority voting, unless there is a dominant shareholder and supermajority voting may be protective of public shareholder interests.
- BlackRock generally opposes
- bundled proposals,
- other business matters where there is inadequate information, and
- shareholder proposals for outlier thresholds on existing proxy access proposals.
- BlackRock evaluates proposals to reincorporate on a case-by-case basis, taking into account changes to shareholder protections.
- BlackRock also evaluates proposals to amend governing documents on a case-by-case basis, taking into account the “rationale for the changes, the company’s governance profile and history, relevant jurisdictional laws, and situational or contextual circumstances which may have motivated the proposed changes, among other factors. [It] will typically support changes to the charter/ articles/ by-laws where the benefits to shareholders, including the costs of failing to make those changes, demonstrably outweigh the costs or risks of making such changes.”
- BlackRock may vote against certain directors where changes to governing documents that affect shareholder rights are not submitted to shareholder votes within a reasonable period of time.
- With respect to governance structures adopted pre-IPO, BlackRock expects boards to regularly review and evolve these structures as circumstances change. Expect engagement on issues such as classified boards and supermajority votes. BlackRock applies a one-year grace period for certain guidelines for directors, such as independence and overboarding, but expects boards to use that time to bring standards in line. However, if a company is an emerging growth company, BlackRock will consider the governance exemptions to exchange listing standards, but expects an EGC to have an independent audit committee within a year.