RI interview: Michelle Edkins, BlackRock: leading the shareholder spring?

If we are experiencing what some commentators have dubbed a ‘shareholder spring’, then one of its most visible signs has been the emergence of BlackRock, the world’s biggest fund manager with assets under management of US$3.7 trillion, into the public corporate governance debate. Signs of its governance preparation for the current spring AGM activity could be detected earlier this year. In January, CEO, Larry Fink, wrote to 600 companies – 300 in the US and 300 in the rest of the world, spelling out the firm’s corporate governance and responsible investing (CGRI) policy. The letter invited companies to talk with the fund manager if they thought there was likely to be a contentious AGM issue; you might call it a governance nudge! The BlackRock contact on Fink’s letter was Michelle Edkins, Global Head, Corporate Governance and Responsible Investment, who, along with her 20-strong team, potentially swings the largest proxy voting bat in the world, overseeing shares in some 10,000 companies. Edkins, a New Zealander, is an experienced governance hand. She trained as an economist and after working for New Zealand’s central bank moved to the UK to join Hermes, the UK fund manager then run by Alastair Ross-Goobey, the renowned governance pioneer. She subsequently followed former Hermes Focus Funds chiefs, PeterButler and Steve Brown, to Governance for Owners, the London based activist governance investor. A move to Barclays Global Investors just prior to its takeover by BlackRock saw her become head of governance for Europe, Middle East and Africa, and then global governance chief based out of San Francisco, when her former boss, Abe Friedman, left in February, 2011. Talking with Responsible-investor.com, Edkins starts from first principles: “We are an active governance investor notably because of the huge index holdings BlackRock has, which in effect make us a long-term owner with a real interest in the health (beta) of the market. For large asset managers it is also a bit of a fallacy that you can just sell a large holding without causing ripples if you don’t like the management.” She says many of the manager’s larger clients also push it to be an active owner: “They have the staff, resources and track record to be well informed about governance issues and engage with us and feedback on what we do. We also have a lot of clients who don’t necessarily ask us to be active on governance, but we take the default position that they would expect us to be.”
Despite the ‘shareholder spring’ allusion to recent pay revolts, Edkins says BlackRock does not philosophically support ‘say-on-pay’ as an ‘investor
issue’, even if they have voted against pay packages where it has been tactically necessary: “We think it shifts the function off the board and onto us when it is really their responsibility to set the right pay and take care of management succession planning, etc. We don’t want to be directly involved in either. When you look at some companies it is really difficult for a shareholder to make an informed view about the best structure or reward: sometimes earnings-per-share might be the correct parameter, other times it might be economic-value-added. Our preference is for the board to motivate management with rewards that are ‘challenging’.” She says BlackRock wants to gauge the “outcome” of remuneration and see that the conditions are in place for transparent pay deals designed to make the company as successful as possible over time. If the manager doesn’t get what it wants as an owner, she says, it acts: “We will vote against directors on the compensation committee if we are not getting the right transparency.” Edkins says the ‘quantum’ or total amount of executive pay, which is often pointed up as a problem and garners the newspaper headlines, is also not BlackRock’s preoccupation: “The difficulty around quantum is that on some level executive pay will always be too much to some people. We understand that for truly talented, mobile, global management there is a price. Yes there has been inflation in packages, but sometimes this has been for perverse tax reasons such as in the US where if you pay over $1m in income it has to be performance-based because of tax implications. There is market distortion though, and we have seen a rise in executive pay where company productivity, performanceand employee pay has not followed.” Edkins says one idea that is circulating in the market is that executives forego share-based incentives in exchange for bigger cash bonuses but that the money be used to buy the company’s shares in the market: “The rationale is that if directors use their own money to buy stock it avoids some of the tax gross-up issues and truly aligns their interest with shareholders. Another emerging practice is cash bonuses that vest over an extended period, sometimes on achieving additional performance targets.”
As a foreigner based in the US, Edkins says it is interesting to meld a predominantly UK and European governance perspective with the US situation. One notable difference, she says, is the combative rhetoric between companies and shareholders in the US: “There is a much higher level of protest votes, and it seems to be quite ingrained. That said, opposition to proxy access, allowing shareholders to put directors forward, is baffling to me. In most other markets around the world this is a relatively easy process but seldom used because boards are aware it can be. It’s the same with majority voting (the ability to apply a majority vote approval to individual directors), which is standard in many markets. I think that will change here because there is a critical mass now.” Edkins says there will be some companies that will resist but they shouldn’t then be surprised if shareholders are less supportive if they do a capital raising or are the subject of a takeover bid. The flipside, she says, is that shareholders have to get more sophisticated about the way they vote on directors because their votes now count: “You shouldn’t vote against directors unless you really

want them out and believe that the board would be better off without them. Dialogue is better. The shareholder proposal mechanism does, I think, sometimes make companies feel defensive and some shareholders don’t always use the mechanism very thoughtfully. That certainly doesn’t mean the companies are right though and many need to realise that dialogue with their investors is not something to be afraid of. In private though the increased level of engagement and dialogue is actually leading gradually to a better mutual understanding.”
Edkins thinks another danger though is too much engagement: “Some investors roll out statistics saying that they engage with a certain number of companies but without enough focus on what the outcome of those engagements is. I would rather say that we engage with just a small subset of the 10,000 companies we invest in but that we engage for change that can be measured. Our strategy is to lobby those companies where we have significant value at risk on behalf of clients.” Edkins says BlackRock’s primary governance concern is whether a board is really taking its job seriously: “We want to know how real are the board evaluations they say they’re doing. How good are the board members? How do we assess this? What kind of board reporting can we expect? What bothers me a bit about the pay debate is that there have been more problems withsuccession issues at companies in the last year that have led to much more value destruction than pay.” Given its size and international holdings, BlackRock is also stepping up its governance activities in markets like Hong Kong and China – often at the regulatory level – where Edkins says the rights of minority shareholders remains a problem: “You invest and put up with the minority shareholder rights problem, or you don’t invest. But with the growth of markets like China, not investing is not desirable, so we want to be patient capital and engage at the market level for change. There has been a great deal of work done by organisations such as the OECD on the cost of capital implications for countries where governance is problematic. What we are trying to suggest to certain regulators are important areas where we think the rules could be updated to make participation and engagement easier for foreign shareholders.” Internally, BlackRock’s Asian governance team is also using data from Asset4, part of Thomson Reuters, to examine which governance information points when applied to its investment universe have tended historically to identify companies with underperformance issues. The manager uses this as an early warning ‘signal’ for future investments: “We think it will allow us to make better, risk-adjusted governance choices between different companies in the same sector, for example.”