Money managers increasing activism on
governance — but quietly
March 19, 2012
Edkins says BlackRock prefers private conversations over filing
Investment managers are stepping up their corporate governance activity,
although they are doing so behind closed doors and not through
high-profile proxy-voting campaigns.
BlackRock Inc. and The
Vanguard Group Inc. are among the money managers increasing their
A BlackRock initiative
seeks to take a leadership role away from proxy-advisory firms.
activity, however, takes place confidentially through discussions about
corporate governance concerns, including executive compensation.
Executives of money
management firms decline to identify specific companies. They think they
can accomplish more in improving corporate governance through private
discussions with company managements and boards than through
high-profile proxy-voting activity, such as introducing shareholder
“I think that the single
biggest change has been a much higher level of engagement or
communication with the companies on governance issues whether initiated
by them or by us” in advance of annual meetings, said Michelle Edkins,
San Francisco-based managing director and global head, corporate
governance and responsible investment, for BlackRock.
But one thing hasn't
“We have not filed proxy
proposals in the past and don't expect to (do so) this year,” said Glenn
Booraem, principal and head of corporate governance at Vanguard,
Malvern, Pa. “I would characterize our program as one of engagement,”
guided by corporate governance principles Vanguard has developed, Mr.
Vanguard this year plans
to engage with some 500 companies, mostly based in the U.S., he said.
Like Vanguard, Ms.
Edkins said BlackRock doesn't file shareholder proposals, largely
because its size enables it generally to have private conversations with
“In our experience
(private engagement) has a fair degree of traction with management. And
we can raise (an) issue without having to dictate how management should
address it,” she said. “In a way, that's always the weakness of the
shareholder proposal route.”
Ms. Edkins said, “We've
had a really positive response” to a January letter about corporate
governance that Laurence D. Fink, BlackRock CEO, sent to some 600
companies worldwide in which the investment adviser has very large
holdings on behalf of its clients, half of which are in the U.S.
consistently said it's really helpful to be asked to speak with our
mainstream investors.” Ms. Edkins said.
Mr. Fink in the letter
encourages “those companies to engage with shareholders before they
engage with proxy advisers,” Ms. Edkins said.
companies should understand shareholder viewpoints on corporate
governance issues “rather than focusing on just getting a green light”
from proxy-advisory firms, she added.
“It is not a criticism
of the proxy advisers,” Mr. Edkins said. “They are really an important
part of the process and help us identify the companies that we should be
focusing our efforts on.”
In this proxy season,
Ms. Edkins pointed out, “The level of engagement has increased.” She
estimates BlackRock's engagements with companies in which it invests is
up 10% to 15% from last March.
BlackRock expects to
engage with between 1,000 and 1,500 companies globally, about 40% of
them in the United States.
“I think a lot of
practitioners would point to that (rise as) having been triggered by the
introduction of say-on-pay resolutions,” giving shareholders a
non-binding vote on whether to ratify the compensation of the CEO and
others in top executive management, Ms. Edkins said.
Even though say-on-pay
BlackRock engage with companies, the firm opposed giving
shareholders a vote on executive compensation. “We actually think this
is a matter for boards to decide, and if shareholders don't agree that
the board has used its judgment wisely, then we (shareholders) can vote
against directors or withhold our vote from directors,” Ms. Edkins said.
“The interesting side
effect of the introduction of say-on-pay has been that companies have
really made a big effort to talk with shareholders directly because of
sensitivity of losing that vote.”
While the conversation
starts on compensation structures, it often leads to other issues
regarding board effectiveness, Ms. Edkins said. Pay policy “is a window
on other aspects of the board.”
often initiated by corporate say-on-pay concerns, drives a lot of
Vanguard's discussions with companies, Mr. Booraem agreed.
(discussions) continuing to rise as companies are doing more outreach
driven to some degree by say-on-pay but (also) a genuine growing
interest in responding to shareholder concerns on governance,” Mr.
Vanguard and BlackRock
use engagement with corporate boards and management to have continuing
conversations about issues.
Things that “support the
financial performance — like risk controls, like good employee
engagement, like relationships with regulators ... tends to support
superior long-term performance by companies when (all) that is done
well” over time, Ms. Edkins said.
governance principles “serve as a great catalyst to put issues on the
table that weren't necessarily on the (proxy-voting) ballot,” Mr.
Vanguard, which has a
corporate governance group of about a dozen people, talks with
executives at many companies on an ongoing basis to establish a
relationship with company executives and directors to identify areas of
corporate governance concerns, Mr. Booraem said.
“A continuing ongoing
engagement (is more productive) than having an engagement driven by a
recommendation by a proxy-advisory service or something like that,” Mr.
biggest topic of conversation tends to be compensation,” Mr. Booraem
said. And with the advent of say-on-pay, “companies are paying more
attention to shareholders” about pay issues.
In that area, Vanguard
seeks to understand how the opportunity for executives to earn pay
incentives “translated to operating results of companies,” Mr. Booraem
“Our fundamental view is
that pay should reflect relative performance and that pay plans should
be structured to align the interest of executives with other employees
and with us shareholders.”
corporate governance team is part of the company's investment function
as opposed to the compliance or legal department, Ms. Edkins noted.
“We think good
governance adds value long-term,” she added.