Asset Management CultureMarch 25, 2020

BlackRock to Hold Directors’ Feet to the Fire

World’s largest asset manager will seek to oust those who don’t meet the firm’s sustainable criteria.

Reported by Michael Katz

In keeping with the decision it made in January to make sustainability the focus of its investment strategy, BlackRock has issued guidelines for its engagement priorities, which lay out its principles for investment stewardship. The world’s largest asset manager, with $7.43 trillion in assets under management, said it will use the guidelines to determine if the companies it invests in are meeting its criteria.

“We have the capacity to engage companies year-round in meaningful discussions on the specific steps they should be taking to manage long-term risks and opportunities,” Barbara Novick, BlackRock’s co-founder and vice chairman, said in a statement. “In every market, directors are elected by shareholders to oversee management. As a result, we have found that focusing on holding directors accountable creates a globally consistent approach to stewardship.”

The priorities are broken down into five main areas in which BlackRock Investment Stewardship will hold the companies it invests in accountable. They are board quality; environmental risks and opportunities; corporate strategy and capital allocation; compensation that promotes “long-termism”; and human capital management.

For its board quality criteria, Black Rock said it wants to better understand how a company’s board assesses its effectiveness and director performance, as well as its role in crisis management in the case of matters such as a cyber event, the sudden departure of senior executives, negative media coverage, or a proxy contest.

It said such events are often material and can significantly detract from a board’s ability to carry out its other responsibilities. The firm said also it wants to see disclosures regarding the board’s position on director responsibilities and commitments, turnover, succession planning, and diversity.

“In our experience, most governance issues, including how relevant material environmental and social factors are managed, require effective board leadership and oversight,” BlackRock said in its eight-page engagement priorities report. “We encourage engagement protocols that foster constructive and meaningful dialogue, including conversations with independent directors to articulate strategic risk oversight.”

In regard to environmental risks and opportunities, BlackRock is asking companies to issue reports aligned with the recommendations of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) by the end of the year.

“Sound practices in relation to the environmental factors inherent to the business model can be a signal of operational excellence and management quality,” BlackRock said in its report. “We will hold directors accountable if a company does not make adequate progress on such disclosures.”

As for corporate strategy and capital allocation, the firm said companies that clearly articulate their purpose and connect it to their long-term strategy are more likely to have loyal customers, engaged employees, and other supportive stakeholders. “This gives a company a competitive advantage and a stronger foundation for generating superior financial returns,” the report said.

The firm also said companies should succinctly and periodically explain their long-term strategic goals and adapt them to reflect the changing business environment and how it might affect how they prioritize capital allocation.

On the topic of compensation to promote long-termism, BlackRock said executive pay should be adequately aligned with performance and shareholder investment return.

“In our engagements, we seek to understand how a specific pay program appropriately incentivizes executives to deliver on strategic and operational objectives, consistent with sustainable financial performance,” BlackRock said. “In general, we expect a meaningful portion of executive pay to be tied to the long-term returns of the company, as opposed to short-term increases in the stock price.”

And concerning human capital management, the firm said it is important that companies explain how they establish themselves as the employer of choice for workers in their industry, saying it is a key factor in a company’s success. BlackRock said employee development, corporate culture, compensation, inclusion and diversity, and equal employment opportunity are all critical components of a strong human capital management strategy. It said it seeks disclosure around a company’s adoption of sound business practices that are likely to create an engaged and stable workforce.

“Where companies are making progress on these critical issues, we expect to support management and the board,” Michelle Edkins, global head of BlackRock Investment Stewardship, said in a statement. “We will hold directors accountable where we have concerns about lack of progress on managing material sustainability factors or inadequate disclosure on business relevant risks and opportunities.”