| Thu Aug 4, 2016 7:13am EDT
BlackRock's voting record clashes with CEO's tough talk on buybacks
BlackRock logo is seen outside of its offices in New York
January 18, 2012. B
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BOSTON When Adam
Kanzer wanted to stop the board of 3M Co (MMM.N)
from including the lucrative impact of share buybacks in their chief
executive's pay, he quoted Laurence Fink.
Sitting atop the
world's largest investment fund manager, BlackRock Inc (BLK.N),
Fink is a vocal critic of companies’ excessive use of share buybacks. The
practice is happening at a rapid clip among S&P 500 companies and
according to critics is helping boost shareholder returns – and bosses’
pay – to the detriment of long-term growth.
Kanzer, who is
managing director of Domini Social Investments, channeled Fink at the top
of his firm's resolution to the 3M (MMM.N)
board, quoting his warning that large buybacks send "a discouraging
message about a company’s ability to use its resources wisely."
It didn't help. The
resolution failed with 94 percent of shares cast voting against it. Shares
held by BlackRock, 3M's third-largest investor with a 5.7 percent stake in
the maker of Post-it notes and Scotch tape, according to its proxy,
apparently were not supportive.
Despite their CEO's
strong views, funds run by BlackRock side with company management on
questions tied to stock buybacks most of the time, according to filings
analyzed by research firm Proxy Insight for Reuters.
BlackRock is not
alone. Large asset managers like Fidelity Investments and State Street
have a similar voting record on the matter, according to the analysis.
exhortations and BlackRock's size make its voting record stand out.
In the last three
years, Fink has made his concerns about buybacks a top theme of an annual
letter to other CEOs stressing the importance of companies investing for
the long term. His views have been carried widely in the financial press
and echoed by U.S. presidential hopeful Hillary Clinton.
BlackRock's nearly $5
trillion in managed assets mean that it is often a top investor in many of
the companies buying back their shares, giving it an outsize voice on
whether that strategy is the right one.
"Larry Fink’s letters
demonstrate that leadership. We hope it's not all posturing," said Brandon
Rees deputy director of the office of investment for the AFL-CIO, of
The AFL-CIO is the
largest federation of U.S. labor unions and sponsored a resolution at
Illinois Tool Works (ITW.N)
that, like Domini’s 3M resolution, called on the company to exclude the
impact of share repurchases from executive pay calculations.
The resolution failed,
with 95 percent of votes cast against it. It is unclear if BlackRock, a
top five investor in the equipment maker, voted for it. The company does
not comment on how it votes or its engagement with individual companies,
and public filings showing its votes are not yet available.
Rees said while he
admires Fink's sentiments, BlackRock does not release enough detail to
fully evaluate whether BlackRock's engagement with particular companies
has much impact.
Fink, who was not made
available to comment on this story, does not think all buybacks are bad.
Some may be a prudent use of excess capital, and BlackRock itself has been
buying roughly $275 million of its own shares every quarter, he has said.
Spokesman Ed Sweeney
said when BlackRock has concerns about a company's direction or corporate
governance, it meets with directors and executives privately to "catalyze
positive changes," and votes against management when talks fail. He added
that capital allocation matters like buybacks are just one of many areas
it considers in its proxy voting process.
In one case, BlackRock
withheld support from two directors at "a large oil and gas corporation"
this spring after the company -- which it declined to name -- did not make
board members available to explain their strategy and capital allocation
decisions, according to its website.
It also did not
support a member of Discovery Communications Inc's (DISCA.O)
compensation committee last year after the company awarded its CEO the
largest pay package in the S&P 500, according to securities filings.
To guide those
decisions, BlackRock turns to a team of 22 people who determine how to
vote on thousands of ballot items each year at U.S. companies' annual
meetings. Sweeney said that this division, headed by Michelle Edkins, is
independent and votes in accordance with, "our fiduciary duty to our
clients." BlackRock did not make Edkins available to comment.
managing director of investment adviser Caprock Group, said BlackRock
cannot vote too aggressively because many clients would not share Fink's
views. For instance, choosing to buy back shares can boost shareholder
returns in the short-term because it raises earnings per share.
"Fink is sincere, but
structurally they have a hard time following through," Weatherley-White
THE POWER OF THE VOTE
S&P 500 firms are
purchasing $445 billion in stock over the last 12 months of earnings
reports, matching the previous year's peak. Add in dividends, and the
total of $838 billion spent surpasses total capital expenditures of $707
billion in that time, according to a Reuters analysis
Much of BlackRock's
nearly $5 trillion in managed assets is in passive investment products
that buy and hold stocks only because they are in a particular index. That
means that proxy votes are one of the few ways of expressing displeasure
with a company. Actively managed funds can sell a company's stock anytime
they become dissatisfied.
"As an index fund
owner, you have to own some really crummy companies" that happen to be in
an index, Fink said at an investor conference two years ago. The "only
power you have is your vote," he said.
But BlackRock rarely
exercised that power. In last year's proxy season, BlackRock funds opposed
five percent of resolutions to approve share buybacks or repurchases,
according to Proxy Insight's analysis for Reuters. To be sure, that was a
stronger record than some rivals like Vanguard Group or T. Rowe Price (TROW.O),
which opposed the resolutions one percent of the time and 2.7 percent of
the time, respectively.
Both T. Rowe Price and
Vanguard declined to comment.
Opportunities Fund MDLOX.N, for instance, opposed management on just two
of 85 resolutions in that period, including at construction firm Bouygues
and distiller Remy Cointreau (RCOP.PA).
BlackRock's Sweeney declined to discuss the votes, but proxy adviser
Glass, Lewis had recommended against both measures on concerns they could
be used to thwart takeover attempts.
Filings analyzed by
Proxy Insight for Reuters also show that of the 30 S&P 500 companies that
bought back the highest proportion of their stock in 2014, funds run by
BlackRock supported those companies' directors about 97 percent of the
time the following year, the most recent period available. That is roughly
as often as they supported S&P 500 directors overall.
Public filings showing
BlackRock's votes on specific directors and shareholder proposals this
year are not yet available, including Kanzer's 3M resolution on buybacks.
Institutional Shareholder Services did not support the change at 3M or at
Illinois Tool, which is a blow since backing from ISS can add an extra 30
percentage points or so to the support level for a typical shareholder
proposal, according to pay consulting firm Semler Brossy.
But Kanzer was
counting on Fink's BlackRock to back him up.
helpful things Larry Fink has been saying about excessive share buybacks,
we had hoped to see BlackRock underscore that message through its proxy
voting," said Kanzer of Domini Social Investments, an investment adviser
that specializes in socially responsible investing and sponsored the 3M
Kanzer noted that his
resolution at least prompted 3M to offer more disclosure around its
rationale for the buybacks, and said he had a "productive conversation"
with 3M management.
Will Domini re-submit
similar resolutions at 3M and elsewhere next year?
"Still thinking about
it," he said.
by David Gaffen and Trevor Hunnicutt in New York; Editing by Carmel
Crimmins and Edward Tobin)
and Media Division of
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