BoardMatters Quarterly, April 2013
Investors taking action
A look at BlackRock’s approach to shareholder engagement
BlackRock is one of the most well-known global investment managers responsible for trillions of dollars of assets. It is also known for its role in engaging companies on governance issues. In the following article, we feature highlights from our conversation with Michelle Edkins, Global Head of Corporate Governance at BlackRock.
She spoke with Ruby Sharma, Leader of EY’s Audit Committee Center of Excellence, and shared her perspective on what she’s seeing in boardrooms around the world as she engages on corporate governance topics.
Ruby Sharma: Engagement is the current hot topic in corporate governance. What is BlackRock’s approach to it?
Michelle Edkins: There are two distinct ways we look at engagement. There’s the context of proxy voting, which follows a similar cycle each year. As shareholders, we review the board, its work, its oversight of management and whether the board’s actions seem appropriate.
These factors inform our voting, but the voting agenda is relatively limited and routine.
Other engagement covers a wide range of governance matters, including a company’s social and environmental impacts and how these affect long-term performance. We engage between 10% to 15% of the companies that we invest in, and that’s just a fact of resources and time. Sometimes, it’s us initiating the contact, and other times, it’s the company. It is very much case-specific.
Reasons to engage
RS: Can you talk more about the different approaches and the purpose of engagement?
ME: Sometimes engagement can be very company specific. We might say, “We’re not 100% certain that this audit committee has a sufficiently robust charter, and we want to understand more about its oversight of management.” Engagement can also be attending an event or meeting to talk to a larger group of directors more generally about our thoughts on the evolving role of the audit committee and shareholder expectations.
In our mind, engagement has a lot of different purposes. One of them is getting information to make a better decision around voting. Another is to build a mutual understanding so that we know the company’s perspective and that the company understands ours.
One of the most valuable aspects of engagement from our point of view is to market-test our position on key topics. So, even if we think that a certain market practice should change, by talking to board directors and management about our views, we can assess the merits of one approach over another. That may result in us changing our policy in a couple of steps.
We do not believe we have a monopoly on being right on these things. We’re trying to protect our clients’ interests and protect the value of their investments. If we take a policy stance that is fundamentally out of line with market practice or is unreasonable, then it’s not going to protect our clients’ interests. It’s going to get us dismissed as being unrealistic.
RS: In what sort of case do you want to meet with board members?
ME: Generally, where it is a matter reserved for the board. Let’s say we have a concern about the composition of the board because, for example, it’s a retail company selling clothing to young women and all of the board members are men in their 60s and 70s. It’s not a judgment on those individuals; I think it’s a valid question. How does this board ensure that management is taking the right approach? That’s not to say that if the board had a 27-year-old woman as a member, it would necessarily be a lot more effective, but it’s a valid question. So we might want to talk to a board member.
In another instance, we may want to understand a board’s thinking on a particular issue. Take succession planning for example. We want to know that there is a plan and that the board is involved in it, which can be difficult to discuss credibly with management.
We sometimes want to register with the board and the company that we are interested in certain subjects, such as how the company is dealing with its environmental and social impacts. We don’t necessarily need to know policy details, but we do want to understand the role of the board in overseeing management and helping develop and implement those policies.
When questions arise
RS: So BlackRock generally supports boards in their oversight efforts, but how is that support sometimes lost?
ME: There are a number of factors we take into consideration when determining whether to support a board. First and foremost is the makeup of the board. Does the board seem well-suited for the company and has it done a good job for shareholders?
Additionally, while BlackRock doesn’t have in the US a stated position on term limits or age of retirement, over time, we have noticed that boards that have a significant majority of long-serving, older board members often have governance problems, whereas ones that refresh regularly tend to have fewer. Ideally, there are directors who have been there awhile and have that institutional knowledge, but there are also new people coming on and questioning, “How come you do it this way? At another board I’m on, we do it differently. Why is this way better?
RS: What proactive steps can a company take to address any concerns you have?
ME: The best thing a company can do is set out clearly, in its own documentation, say on its website or in its proxy statement, where it stands on certain issues, how it got to that position and why it thinks its approach will enhance the value of the company over the long term and protect shareholder interests.
The role of the audit committee
RS: And what should the audit committee do?
ME: Unfortunately, we usually get involved after the audit committee hasn’t done a good job. It’s one of those things that when it’s going really well, it is under the radar. It’s when it’s going badly that it comes to the fore.
RS: Well, even if it’s after the fact, that’s where the best learning can be done.
ME: Ultimately, board effectiveness is about basic human behavior and group dynamics. I’m a firm believer that any training program for directors should definitely include something about cognitive biases and groupthink in decision-making because, so often, that is where things go wrong. Everyone thinks the other person is going to say something, or everybody thinks somebody else is the expert.
This is one of the reasons that, in our view, diversity can help. Better outcomes are likely when you have a broad range of people with different perspectives and experiences, who can ask apparently naïve questions, for example, “I am not an expert in deep-sea drilling, so could someone please explain to me why this is not risky for us, but it was risky for somebody else?”
RS: There are required audit committee disclosures, but do you think there should be more voluntary disclosures, to help you get a better sense of what you’re talking about?
ME: I think it could be helpful, but in the US, in particular, disclosing too much can be a liability. Several UK companies publish detailed audit committee reports that discuss what the audit committee has done and give shareholders a sense of the extent of the committee’s work program. Whereas in the US, even those companies that have generally good standards of disclosure and communication tend to publish an audit committee report that makes only the required disclosure.
RS: A lot of audit committees and board committees do self-evaluations. What are your views on evaluations?
ME: When boards do these evaluations of their own volition because they want to improve their practices, they’re valuable. What concerns me is that sometimes it is more an exercise of going through the motions.
Survey-based evaluation done by the corporate secretary, I would argue, is something audit committees should do every year, and then periodically, say every third year, they should have an externally facilitated review that involves interviews and a more thorough, blank-sheet-of-paper approach.
RS: Would you look for disclosures that this kind of evaluation has happened?
ME: In the US, we wouldn’t expect it to be disclosed, but it’s helpful to know. In Europe, we do because it’s part of the market code and a best practice in several markets. Committees have periodic evaluations conducted by an external party. In Europe, we see boards that say, “As a result of this, we have decided to bring in another director who has this kind of background,” or “We’ve added another responsibility to the audit committee’s charter.”
A self-evaluation is better than nothing, but for boards that really are committed to being the competitive advantage for their companies, an external evaluation, even though it might be a little uncomfortable, can be hugely beneficial.