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Research of shareholder voting shows lack of support for proxy proposals intended to discourage stock buybacks


For other recent attention to fund manager support of stockholder interests, see


Source: Reuters, August 4, 2016 article



Business  |  Thu Aug 4, 2016 7:13am EDT

BlackRock's voting record clashes with CEO's tough talk on buybacks

BOSTON   By Ross Kerber

The BlackRock logo is seen outside of its offices in New York January 18, 2012. B



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 Corp (STT.N) have a similar voting record on the matter, according to the analysis.

But Fink's 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 Fink's efforts.

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.

Matthew Weatherley-White, 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 said.


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.

BlackRock's Global Opportunities Fund MDLOX.N, for instance, opposed management on just two of 85 resolutions in that period, including at construction firm Bouygues SA (BOUY.PA) 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.

Proxy adviser 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.

"Considering the 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 resolution.

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.

(Additional reporting by David Gaffen and Trevor Hunnicutt in New York; Editing by Carmel Crimmins and Edward Tobin)


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