Under the bonnet of BlackRock’s engagement priorities

This month, BlackRock provided a wealth of detail to expand on Larry Fink’s last letter to the CEOs of its portfolio companies – enlarging on climate risk, ‘strategy, purpose and culture’, diversity, human capital management and executive remuneration. The release of these five commentaries is intended to communicate its investment stewardship group’s thinking ahead of any engagement in the coming proxy season.
Fink’s letter was all about a sense of purpose: corporate strategy disclosures, he said, should clearly explain a company’s purpose; what it is in business to do. “Companies that better articulate their purpose are more likely to have engaged employees, loyal customers, and other supportive stakeholders,” says the asset manager’s website. Of course, UK companies are already required to disclose statements of purpose, or explain why they have not, under the UK corporate governance code. In the absence of a code in the US, it is left to principles and guidelines and Fink letters to require companies to comply.
In order, the first issue to be addressed, climate risk, focuses on the TCFD disclosures, which BlackRock endorses. It has been engaging with companies – particularly those most exposed to fossil fuel risks – on board oversight, “how the company assesses potential opportunities that the changing market may present”, how it might “influence future long-term capital expenditure plans”, and scenario analysis it has conducted. The news for shareholder proponents is this: “Where shareholder proposals on climate risk clearly address a gap in investment-decision and stewardship-relevant disclosure that we believe will lead to material economic disadvantage to the company and its shareholders if not addressed, and management’s response to our prior engagement has been inadequate, we will consider voting in favor of proposals that would address our concern.” Got it, proponents?
In contrast, the fund will not vote on, but will engage with, companies when it comes to strategy and purpose. It expects companies to come up with similar statements to those produced under the UK corporate governance code, but to adapt and change these over time to reflect changing priorities. It also provides a detailed list of topics on which it typically engages – questions it asks – when talking to companies about purpose.As important is how a company defines ‘long term’ which, it says, will be different for an oil and gas company compared to an apparel manufacturer.
On diversity, there is a substantial description of why diversity is a performance imperative and therefore an investor issue, followed by a series of questions that BlackRock typically asks boards it engages with. Again, in line with its voting policies, it says: “following engagement and a reasonable time for the company to respond, we are likely to vote against directors on boards that don’t make progress on diversity without a specific and credible explanation”.
Following on from board diversity, the commentaries move to employee diversity, describing most of the companies it engages with as “in a war for talent”. The human capital management issue is also tied into strategy and purpose, since these two issues play into a company’s ability to manage and motivate its employees effectively. This is followed by another list of questions and issues used in engagement, from diversity statistics to employee engagement programmes and disclosure – an evolving area, but one that the SASB is addressing.
The executive pay commentary is the longest, most detailed and most specific of the five topics identified. It includes a detailed description of how BlackRock analyses executive pay and comes to a “voting” conclusion, where votes are applicable. The commentary is supposed to be global. Although it identifies six issues that might make the fund vote against remuneration committee members or Say on Pay votes, it would seem that it is pretty hard to fail these criteria, even for the most overpaid CEOs in the US. According to As You Sow’s latest report, BlackRock only voted against 11 of these CEOs; a higher figure than last year’s (7%), though not by much. Of most note about this commentary, however, is the laissez faire attitude of most of its “policies” on pay. All 12 of them can largely be summed up as: we have no real preference, we just want you to explain it properly.
BlackRock’s commentaries are all eminently reasonable and, in large part, backed by independent research that ties its opinions to value growth and outperformance. Within this rationality, however, there is an inherent threat: “While we are patient with companies, our patience is not infinite,” says one. But it applies to all.