The Corporate Governance Intelligence Council Blog

Blackrock’s Strong Statement to Boards

Blackrock have made a strong statement to boards of portfolio companies: we expect you to act on climate change risk & gender diversity, and if you don’t, you may not be able to count on our vote.

In their recently published engagement priorities they cite board diversity, climate and social issues at the top of the list.

Board diversity:

Over the coming year, we will engage companies to better understand their progress on improving gender balance in the boardroom. Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions.  If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.

Climate change:

For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary.

Continuing the theme from recent years, Blackrock is one of many investors calling for better and more transparent disclosure of climate risks, the correlation to and impact upon strategy and the process of risk mitigation and management.  Direct engagement can be expected for companies where BlackRock has concerns, potentially leading negative voting on the re-election of directors deemed responsible for failure to address these concerns in a timely fashion.

Many climate and sustainability related proposals receive low single digit support, are we about to see many get a significant bump?

New CGIC Study – Board Evaluations

The latest Corporate Governance Intelligence Council study has been released to council members. This two-part study focuses on investors views of board evaluations, and crucially the role they play in evaluating board credibility for voting and investing decisions.

In the first report, “Evaluating Board Effectiveness”, North American and European proxy voters are big advocates of board evaluations.  They believe that sound board evaluations:

  1. Confer credibility and strategic value to a company’s stewardship.
  2. Enhance board effectiveness and better align directors with shareholder interests.
  3. Should play a key role in board refreshment and renewal.

Board evaluations are clearly considered an important tool, providing both strategic value and credibility to a company’s stewardship.board eval post 1

“If it’s truly objective it can [provide strategic value] because every officer of a company is subject to these evaluations and if it’s done in an objective, critical way it helps to address weaknesses and to raise the bar and the performance of all officers and I would say the same for all directors as well.” Large U.S. investor.

With 76% of proxy voters believing in the importance of a “good” board evaluation, the following question is an obvious one.

board eval post 3

“An evaluation program is probably one of the most important things a board can do. It’s continuous improvement from inside.” Mid-size Canadian investor.

To learn more about the perceptions and expectations of North American and European proxy voters concerning board evaluations, including their definition of a “good” evaluation, the role in valuation and voting decisions and how to effectively realize both board and investor expectations on this crucial process, please contact David Bobker.


SEC Board Diversity Recommendation – Item 407(c)(2) of Reg S-K

As its meeting last week, the SEC Advisory Committee on Small & Emerging Companies discussed and approved board diversity recommendation.

Under current regulation – Reg S-K, item 407(c)(2)(vi) – companies are required to disclose whether, and if so how, a nominating committee considers diversity. The concern is that this rule fails to generate useful information and that further disclosure is warranted.  Several shareholder groups have been vocal about this for some years and engaged many companies to voluntary enhance disclosure on this issue.

The committee has drafted an amendment stating that:

The Commission amend Item 407(c)(2) of Regulation S -K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are diverse. While, generally, the definition of diversity should be up to each issuer, issuers should include disclosure regarding race, gender, and ethnicity of each member/nominee as self-identified by the individual. While disclosure should be the default, issuers should have the option to opt-out. 

There is further debate on the last sentence, providing issuers with the ability to opt-out, as this would allow companies to withhold information that the committee has previously determined was relevant to, and required by, investors.  It was commented on that there is already sufficient flexibility by allowing companies to define diversity.

The committee voted to remove the last sentence from the regulation and appropriate regulation will be written accordingly.

Additional clarity on this disclosure will surely be welcomed by investors, although many will continue to push for greater disclosure of diversity in its many iterations and, crucially, the process through which a company evaluates and considers this in evaluating the board and seeking suitable board candidates.

SEC Staff Comments on Proxy Access “fix-it” Proposals

No surprise that the number topic of discussion this proxy season so far is…proxy access. (You thought I was going to say the Trump Administration didn’t you!)  Proponents are not just targeting companies to adopt bylaws, but are equally focused on submitting “fix-it” proposals to companies that have previous adopted bylaws considered by certain shareholders to fall short of “best”, or “acceptable” standards.

SEC staff have, so far, been consistent with last year; affirming that shareholder proposals seeking adoption of proxy access bylaws are considered substantially implemented if the company adopt terms permitting shareholders that own 3% or more for at least three years to nominate the greater of two directors, or 20%, of the board (3-3-20).  This holds true even in the event the company decides to adopt additional restrictions, such as aggregation limits.  It would appear that in the staff’s view substantial implementation does not mean exact implementation.

The situation surrounding “fix-it” proposals is a different story.  Aggregation limits remain an issue for many shareholders.  Earlier in the season we saw a number of proposals asking companies that had previously adopted proxy access bylaws to amend certain terms (such as the number of shareholders that can aggregate to form a group).  Previously, the SEC did not grant relief to companies in this scenario.  However, mostly due to concerns of larger shareholders these proposals did not received significant support: H&R Block (30%), Microsoft (27%), and Whole Foods (37%).

After this first salvo shareholder groups changed course to adopt a more focused approach.  A number of companies with later deadlines received new proposals to amend their proxy access bylaws seeking modification of a single term:  amending the 20-shareholder aggregation limit to allow between 40 or 50 shareholders to form a group.

Last week, the SEC staff responded to a number of no-action requests on this issue with mixed results.  It appears that companies that clearly detailed the inability of the increased aggregation limit to materially enhance the ability of shareholders to use proxy access were granted relief. As any combination of shareholders possessing minimum ownership thresholds are able to form a group, this can, therefore, be viewed as having met the essential objectives of the proposal.

We will provide further details on this issue during the coming weeks.

NYC Pension Funds: Climate Change Study

Trustees of the New York City Pension Funds have announced that they will conduct a first-ever carbon footprint analysis of their portfolios. To conduct the initiative the funds have selected two independent advisors to examine the associated short- and long-term investment risks.

“In the 21st century, companies must transition to a low-carbon economy, and a failure to adapt to the realities of global warming could present potential investment risks. As part of the initiative, the funds have selected two independent advisors to examine the associated short- and long-term investment risks.”

Review the press release from the New York City Comptroller here.

In a recent CGIC study we examined the impact of CSR/ESG in voting and investment decisions, including the investment community’s concerns and preferences of disclosure efforts and third-party reporting frameworks.

Please contact Dave Bobker to review the Executive Summary of this report.  Council members can access all three CSR/ESG related research reports in the member gateway.