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What You Should Know About BlackRock’s Updated Voting Guidelines

BlackRock updated its proxy voting guidelines, and some of the key highlights since its last update include:

Two women on boards.  In its discussion of the importance of boards comprising a diverse selection of individuals bringing to bear a range of experiences and competing views and opinions, BlackRock emphasized that in addition to other elements of diversity, the investor would “normally expect to see at least two women directors on every board.”

Overboarding limits.  BlackRock’s views that outside directors should only sit on four boards have long been more restrictive than the proxy advisors.  Now BlackRock also indicates that CEOs should just serve on one other board besides their own (for a total of two boards).
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BlackRock’s Annual Letter to CEOs Focuses on Doing Good and Continues to Emphasize Governance and Strategy

Reports of BlackRock’s annual letter to CEOs have largely focused on Larry Fink’s exhortation that companies must serve a social purpose and “make a positive contribution to society” in addition to delivering on financial performance.

The letter also focused on “a new model for corporate governance,” since index investors who cannot walk away from companies that they disapprove of must be active and engaged agents for their clients.  Shareholder engagement, Fink states, have been too focused on annual meetings and proxy votes, rather than a year-round conversation about long-term value.  The firm intends to double the size of its investment stewardship team over the next three years, to more than 60 people, so that discussions with companies can be “deeper, more frequent and more productive.”

As in previous letters, BlackRock asks that companies explain their strategic framework and explicitly affirm that it has been reviewed by the board of directors.  
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BlackRock Wants Equal Voting Rights but Opposes Exclusion from Indexes

BlockRock has made clear that it disagrees with recent decisions by index providers to exclude companies based on governance issues. Although not mentioned by BlackRock specifically, this likely refers to actions by S&P and FTSE Russell to require some levels of public voting rights or the complete elimination of multi-class shares before companies can be included in certain of their indexes. We previously discussed those announcements here.

BlackRock believes that these actions limit access to the universe of public companies for their index-based clients, depriving them of opportunities for returns. Policymakers should set corporate governance standards through regulation. Index providers should reflect the “investable marketplace” in diverse and expansive benchmark indices, in order to facilitate investors’ use of those indicies and align them with the objectives of public equity investors.
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Board Gender Diversity and Climate Risk Inform Vanguard’s Investor Stewardship

Vanguard cast more than 171,000 individual votes at nearly 13,000 companies in 68 countries for the 12-month period ending June 30th, making the firm one of the most influential investors in public companies.  Its recent Investor Stewardship Report and letter to CEOs highlights two key governance priorities. 

Engagement is a vital component of Vanguard’s approach, as it held 954 engagements with 680 companies.  Companies should be aware when talking with Vanguard that the topics discussed more than half of those times include the composition of boards, governance structures and executive compensation.  While board diversity has long been an important focus, the report states that companies should be prepared to discuss, in their public disclosure as well, their plans to incorporate diversity over time into their board composition. 
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Vanguard Explains Updates to Its Voting Policies on Environmental and Social Proposals

Vanguard has updated its proxy voting guidelines. Previously, the policy for how the investor will vote on environmental and social proposals indicated that, absent a compelling economic impact on shareholder value, the fund will typically abstain from voting on these proposals. This reflected the belief that these decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund’s investment and management is not responsive to the matter.

The revised guidelines state that the fund will evaluate each proposal on its merits and may support those where the investor believes there is a “logically demonstrable linkage” between the proposal and long-term shareholder value.
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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company.
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State Street Advises Boards to Focus on Environment and Social Sustainability

State Street’s letter to board members emphasizes the importance of sustainability in long-term corporate strategy. As they have previously focused at length on the importance of independent board leadership, which we discussed here in 2017 the investor will shift its attention to board oversight of environmental and social sustainability in areas such as climate change, water management, supply chain management, safety issues, workplace diversity and talent development. State Street believes that while each company is different, these areas can pose both risks and opportunities that affect financial returns, citing notable examples from recent scandals related to automotive emissions, food safety and labor issues.
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State Street Warns Companies Against Settlement Agreements with Activists that Focus on Short-Term Goals

Activist campaigns targeting companies with market capitalizations above $500 million have resulted in approximately 13% of total new board appointments in 2016 so far. As of August 2016, 49 companies have settled with activists by conceding 104 board seats, which is nearly the same number as during all of 2015. Less than 10% of board seats gained by activists in 2015 and 2016 were through a proxy contest, compared with 34% in 2014.

The increasing number of settlements in activist situations has led to a report by State Street Global Advisors (SSGA). The investor is concerned that the rapid rise in settlement agreements may represent a focus on short-term priorities at the expense of “near-permanent” index investors.
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State Street Stewardship Report Highlights the Investor’s Approach to Targeted Engagement

In its annual stewardship report covering 2015, State Street Global Advisors (SSGA) indicated that it had voted at 15,471 meetings in 81 countries.  The investor voted against management proposals 12% of the time and in favor of shareholder proposals 14% of the time.

In light of the difficulty for passive index managers that are invested in thousands of companies globally to actively oversee their holdings, SSGA develops an annual stewardship program based on its strategic priorities by focusing on specific sectors and environmental, social and governance (ESG) themes.  For 2015, SSGA’s sector focus led them to engage with 48 pharmaceuticals and 95 consumer discretionary companies. 
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