20
16
Q1
B U I L D I N G C O N N E C T I O N S
for the long term
Table of Contents
QUARTERLY REPORT |
▸ Engagement with Issuers and Statistics
▸ Voting Highlights and Statistics
▸ Active Ownership and Responsible
Leadership
▸ Market Development and Trends
MARCH 31, 2016
Table of Contents
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Engagement with Issuers¹ and Statistics
¹ The companies referred to are for illustrative purposes only and not as a recommendation of any particular securities.
² The Americas Engagement Statistic Report is a reflection of 1st Quarter 2016.
³ Basic engagement is generally a single conversation on a routine matter; Moderate engagement is technically more complex and generally involves
more than one meeting; Extensive engagement is technically complex, high profile and involves numerous meetings over a longer time frame.
3
Level of Engagement³ Topics Discussed
Number of
engagements Basic Moderate Extensive Environmental Social Governance
126 94 19 13 7 9 125
Americas Engagement Statistics²
We continue to engage with companies on matters of governance and leadership
with an emphasis on long-term value and board leadership, and BlackRock’s
Investment Stewardship (“BIS Americas”) conducted approximately 126 company
engagements in the first quarter. These discussions typically focused on corporate
strategy, board composition and skills, executive compensation, bylaw
amendments, issues related to capital structure and executive succession planning,
and sustainability reporting, among other matters. We believe that this private,
issues-based dialogue is helpful in building mutual understanding, and can better
position us to effectively engage on behalf of clients in the event of some future
concern regarding a particular corporate governance issue or proxy proposal. The
below examples reflect engagements that merited particular focus on
environmental, social and governance (“ESG”) considerations. We aim to frame
our engagements in the context of long-term value creation.
.We engaged a large developer and operator of residential real estate to hear about
the company’s updated governance features. The board has taken proactive steps
to evaluate the appropriate refreshment policy and chose to adopt guidelines for the
tenure of its directors. Similarly they articulated the expectations of the length of
service of a lead independent director as well as committee chairmen. They
explained that the ideas were put forward by the board in order to demonstrate their
work on assuring fresh thinking and diversity of perspective. Additionally we
discussed positive improvements to the compensation structure, the adoption of
further enhanced governance provisions, as well as director time commitments
required in board service. Given recent controversies, we provided feedback on the
company’s sustainability reporting, which we noted for its exemplary disclosure, but
suggested areas where shareholders may benefit from more detail. We are
encouraged by the proactive actions of the board and will continue our efforts to
engage in a constructive way.
1
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas4
We engaged with a global insurance company that provides products and services
for commercial, institutional and individual customers. Of late, the company has
faced pressure from two activist shareholders who urged the company to break up,
publicly criticizing its performance, organizational structure and expense
management. The company noted that it was now striving toward a structure built
on the modularity of self-sufficient business units, highlighting that this
organizational structure will make it easier to assess and target potential strategic
opportunities. The company explained that it has already begun exiting from
businesses, and introduced an expense initiative by which it intends to centralize
certain parts of its work force in low cost centers and hubs, relying more on
automation to optimize the expenses. However, the company stated that a break-
up at this point would have a negative impact on shareholder value, reducing
diversification benefits while making less capital available for distribution to
shareholders, among other objections. After discussing these strategic and
structural concerns, we asked about the board’s assessment of the pressure by the
activists. The company indicated that it has engaged with the activists, and that
some of their views on streamlining the company were aligned with the board’s
view. The company further highlighted that the board is open to shareholder views,
had never been prone to entrenchment and board refreshment was ongoing,
having recently appointed directors to add technological expertise. The company
has since settled with the activist shareholders by granting two board seats. We
will continue to proactively monitor developments and engage with this company.
2
We met with a large cap technology company, to discuss with management and
board directors current areas of focus, options being explored for the business, and
specific efforts to create value for shareholders. The company has a good
understanding of the public criticisms levied against it and has a clear vision. The
board and management are working together to make sure that the company has
viable options. We discussed how they will evaluate success, key metrics used,
areas they’ve seen improvement in and reflections on some of the strategic
choices. We also delved into the details of board dynamics and managing external
pressures. Lastly we explored challenges in human capital management and how
they are being addressed. We will continue to engage as the situation evolves.
4
BlackRock engaged a mid-sized tire manufacturer on product safety. Our goal was
to understand how the company evaluates its performance in this area and the
metrics used. The company told us that tire recalls, warranty payments, and
property damage claims were all relevant metrics, and added that it discloses most
of these on the National Highway Traffic Safety Administration website or to the
government as required by law, adjusting these for failures due to outside factors
such as punctures or overloading. The company further explained that it does not
publicly disclose the adjustment data because it considers this information to be
confidential to the business. It has long followed a robust product withdrawal
process before other auto manufacturers began a “new” strategy of proactive
recalls. The company explained the importance of the approach to err on the side of
recalls in order to protect its reputation. We were satisfied with the company’s
approach and explanations.
3
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas5
We engaged with a small-cap institution that offers deposit, lending, insurance and
other financial services to individuals, municipalities and businesses, to learn more
about its operations, governance program, and long-term strategy. The company
described its history and operations within the small, regional bank ecosystem. We
discussed its recent acquisitions to better understand what the company believed
were its long-term organic growth and cross-sell opportunities in the region. While
describing its long-term strategy to diversify, the company highlighted the
complementary expertise gained by the recent acquisitions, stressing that given the
specialized customer base, the company targets well-established businesses with
operational history in the region. We asked about the board’s approach to capital
allocation. The company aims to balance keeping a sense of tradition in its regional
operations and modernizing some of its branches so that customer interactivity can
be enhanced through technology. We also discussed CEO succession planning
and management talent review, a process overseen by the compensation
committee of the board. The board conducts bi-annual evaluations of emergency
succession planning, as well as a talent review for the top fifteen positions at the
company. For board refreshment, the directors consider expertise, geography, and
diversity. The three recent director appointments were cited as evidence of board
refreshment, although increasing gender diversity has been difficult as director
nominees need to have a deep understanding of the region, as well skill-sets
specifically identified by the board. We encouraged increasing the company’s
prioritization of recruiting female directors to the board and discussed specific
academic research that correlates gender diversity with better decision-making in
boardrooms.
5
We engaged with an electric power company on its 2016 sustainability report and
environment-focused strategies including a goal to reduce its CO2 emissions by 30
percent by 2035. The company explained that it has a long-term goal to evenly
distribute its power generation between coal, gas/oil, and renewables. The board’s
Nuclear and Environmental Committee meets before every full-board meeting, six
times in the past year. The board is currently examining major investment
decisions linked to the company’s overall commitment to CO2 reductions. It believes
it is ready to meet and mitigate any risks stemming from regulatory changes
following COP21, potential impacts on customer satisfaction rates and energy-
source reliability issues remain concerns. As a result of our engagement, we gained
confidence that the board is well placed to change its strategy should it become
necessary as a result of regulatory changes or an accelerated adaptation to a low-
carbon economy.
6
7 We spoke with two independent directors of a small-cap bio-pharmaceutical
company which focuses on the discovery and development of therapeutics to treat
rare diseases. For the past several years, we engaged with the company around
its problematic executive compensation structure, and the consequent poor Say-
on-Pay results at recent shareholder meetings. During the course of our
engagements, we realized some of the issues – on both strategy and pay – were
partly due to a former CEO’s management style. We engaged with independent
directors to assess how the board is overseeing the transition period. The company
is intently focused on attaining a key regulatory approval for its main asset, while
simultaneously undergoing a CEO succession process. The directors highlighted
recent director appointments that have enhanced the board’s pharmaceutical and
commercial expertise. The directors said the board prioritizes three things
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
8
6
operationally: the long-term R&D program, expense discipline, and the
organizational structure. We discussed the performance of the interim CEO, his
successful management of the evolution of the internal culture, and the importance
of management’s focus on the goal of FDA approval. The directors reassured us
that performance-based share grants will be introduced to align executive pay with
investor expectations. These performance-vesting equity plans will have milestone
targets corresponding to the strategic imperatives at the company. Time-based
equity grants will be phased out. When asked about the board refreshment process
over the medium-to-longer term, the directors said that the board would look for
candidates with experience in accounting, and expertise in newer technologies,
such as gene therapy. They expressed satisfaction with the interim CEO’s role in
bridging the gap between management and the board which existed under the
previous CEO. Lastly we encouraged better disclosure to provide investors
enhanced insight as to how the company is managing this ongoing transition.
We have engaged with a large logistics company on a number of occasions to
discuss governance matters, including the board’s rotation of the lead independent
director role. More recently the company informed us that the new lead independent
director will serve on a more permanent basis. We believe that this will mitigate
shareholders’ concerns whether the chairman, who is a former CEO, is
independent. The board also believes that having a lead independent director will
enable the board to engage with shareholders more effectively. Additionally the
board extended the performance period for the executive compensation plan from
one to three years. We believe the company has made meaningful progress in both
governance and executive compensation. We will continue to engage with the
company on other governance issues, including its dual class structure and a
number matters raised in shareholder proposals.
9A few years ago, we engaged a large global retailer when allegations of bribery
surfaced at the company. As in previous years, the company’s response to our
questions about the allegations continued to be limited due to an ongoing
investigation. However, beginning early last year, the retailer has engaged with us
on the overhaul of their compliance systems. It has, for example, changed its
whistleblower reporting lines from regional to global headquarters, which the
company maintains is a reflection of a ubiquitous culture of zero-tolerance towards
corruption. With the help of an external audit firm it has also implemented a global
system in which staff can audit any of the company’s more than 9000 third-party
vendors. The company claims to be the only retailer with this capability. Although
we acknowledged the improvements in their anti-corruption program and the
absence of any new incidents, we explained again our rationale for voting against
certain directors over the years. We also asked if the founding family, who have a
controlling stake in the company, have veto power over new board nominees. The
company informed us that the board has a robust board succession plan which
ensures highly talented and experienced directors (many of them have been CEOs)
so there should be no concerns about the family’s control or of director
entrenchment. While we are encouraged by the improvements at the company, we
will continue to monitor developments.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Voting Highlights and Statistics
7
Americas Region Voting Statistics4
Country
Number of
meetings
voted
Number of
proposals
% of meetings voted against one or
more management
recommendations
% of proposals voted against
management
recommendation
USA 379 3,015 19% 4%
Canada 34 249 24% 4%
Latin and
South
America
180 778 44% 23%
Americas
Region Total593 4,042 27% 7%
4 The Americas Statistic Report is a reflection of 1st Quarter 2016 and sourced from ISS Proxy Exchange on April 4, 2016.
In the Americas, the first quarter generally sees relatively low proxy voting volume.
Nonetheless, we continued to vote and engage around annual and special
shareholder meetings.
1A developer and manufacturer of industrial components faced a proxy contest from
an activist alleging underperformance, poor governance, and board entrenchment.
We engaged with both sides to understand the different visions for the company’s
strategy and growth, areas of focus with regards to governance, and the
qualification of nominees to the board of directors. Both sides provided extensive
detail into areas of opportunity in operational cost savings, investments, and client
focus. In our judgment, management was open to exploring all options to maximize
value for shareholders. We signaled to the company that the pace of change on the
governance front has been, in our view, too slow. However, the company has made
changes and publicly committed to further progress. With regards to the directors,
we set out our expectations on board composition and were satisfied to see the
company added a new director and maintained an open offer of settlement with the
activists. Overall we felt that while a degree of change was warranted, the company
was responsive to shareholder’s concerns. We supported the full management
slate going into the annual meeting; the meeting was subsequently postponed as
the company received an offer to be acquired.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
We engaged a large provider of information technology and enterprise services
around the issue of external time commitments of its directors. We frequently
discuss this issue and seek to understand how both boards and the directors
themselves manage their various obligations. Our evaluation focuses on whether
these time commitments in any way weaken a director’s focus on board work rather
than the contribution or qualifications of the director. In this case, the lead
independent director engaged and addressed our concerns, elaborating on the
specific cases and how they are managed. We were satisfied with how the board
deals with these matters. While we will continue to closely follow this topic at this
company we chose to support all directors up for election at this meeting.
2
8
Voting Highlights and Statistics
The main themes for our
engagements related to voting this
quarter included M&A transactions,
contested meetings, and board
composition & refreshment.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Active Ownership and Responsible Leadership
In February, BlackRock’s CEO Larry Fink, sent a letter to 1300 company CEOs
globally to outline our views on how companies can shape the conversation in
relation to long-termism. As a fiduciary and significant shareholder in thousands of
companies, we believe we have a responsibility to represent our clients’ interests to
companies we invest in on their behalf and, in that way, to be good stewards of
their capital. We believe that good corporate governance – in terms of quality
leadership at board level and quality management by executives – is critical to the
long-term value creation by companies that our clients depend on to reach their
financial goals.
In the letter, we set out four key things that companies could do to encourage an
ecosystem consistent with long-term investment. Firstly, CEOs can lay out annually
their strategic framework for long-term value creation, and equally important,
explicitly affirm that their Boards reviewed those plans. Further, once these plans
are established, companies can move away from providing quarterly earnings
guidance, and can frame quarterly reporting as an “EKG” against long-term
“baselines”. They can also better report on, and explain how they are addressing,
the long-term risks, and opportunities, relating to the environmental, social and
governance (ESG) factors inherent in their businesses. Finally, CEOs can use their
voice to promote public policies that support long-term investment, including: tax
and other provisions consistent with longer investment holding periods and
increased public investment – and private financing – for the infrastructure needed
to sustain thriving economies.
Feedback on prior letters, which also promoted long-termism, as well as the early
responses to this year’s letter, suggest these messages resonate with corporate
leaders around the world. The most consistent feedback is that it is helpful to
companies to know they have the support of a long-term investor in taking
decisions that will have a payoff down the road but requires sacrifices in the near
term.
9
Thought Leadership
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Active Ownership and Responsible Leadership
Members of Americas team spoke at a number of events over the past quarter, with
the objectives of furthering the public policy debate on matters deemed important to
investors and/or promoting an increased understanding of BlackRock’s approach to
corporate governance. We target events that enable us to connect with key
stakeholders and thought leaders, including corporate directors, senior members of
management teams, and other shareholders.
The following is a list of select speaking events from the quarter, and subject matter
covered:
REITWise: NAREIT's Law, Accounting & Finance Conference -
Washington, DC
We participated in a panel discussion to an audience of REIT executives. Topics
included proxy voting policies and processes, shareholder engagement, board
composition and diversity, and proxy access. We expressed our views on certain
REIT-specific governance issues, such as the governance flexibility provided to
REIT boards under the Maryland Unsolicited Takeover Act (MUTA) and our
expectations that boards use such flexibility in good faith or be held accountable by
shareholders. We also highlighted our expectations of companies’ to operate with a
long-term mindset and report near and mid-term results against a clearly articulated
long-term strategy.
Forum of Corporate Directors, Annual Governance Outlook - Orange
County
We presented to an audience predominantly of board directors based in Southern
California. We explained BlackRock’s perspective on board effectiveness, including
diversity and board evaluations, developments in executive compensation and how
we are integrating environmental social and governance (ESG) data more formally
into our investment processes and stewardship program.
Globe 2016, Sustainability & Innovation - Vancouver
The Globe 2016 conference was an international gathering of business leaders
focused on sustainability issues. We presented on the investor perspective on
sustainability and explained how BlackRock is encouraging enhanced reporting by
Speaking Events
The Corporate Governance and Responsible Investment team changed its name to
BlackRock Investment Stewardship, effective January 1, 2016. The team’s new
name better reflects the focus of the team’s work on protecting and enhancing the
long-term value of our clients’ investments through a range of engagement
activates. The Investment Stewardship team is focused on fulfilling BlackRock’s
responsibilities as a long-term investor on behalf of clients, principally through proxy
voting and engagement with companies on governance, environmental and social
factors material to their performance.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
companies on the most relevant ESG factors in their business. We also explained
how we are integrating ESG data into our investment processes and stewardship
program and what that means for companies (see below).
2016 Shareholder Activism Conference, Simpson Thacher and Columbia
University - New York, NY
We conveyed our views on shareholder activism to an audience of issuers,
bankers, advisors, and investors. The panel discussion covered a range of topics
related to the current state of hedge fund activism. We provided our perspectives
on engagement with portfolio companies; our expectations of boards and
management teams to clearly articulate strategies, performance metrics, and
measurement timeframes; and our framework for how we evaluate activist
situations and vote at proxy contests.
Harvard Law School, Corporate Governance Roundtable - Boston
We participated in the semi-annual Harvard Law School Corporate Governance
Roundtable, a gathering of investors, corporates, advisors and academics. Many
topical issues were debated by the participants including proxy access, shareholder
proposals on environment-related disclosures, shareholder activism and
shareholder-director engagement.
Council of Institutional Investors, Spring Meeting - Washington, D.C.
We participated in a panel on the topic of “Broadening the Definition of Risk –
Environmental Factors”. We explained how BlackRock is integrating ESG data into
our investment processes and stewardship program and what that means for
companies. Similar to other presentations on this topic we highlighted how, over
the long-term investment horizons observed by our clients, many of those aspects
of running a business that have environmental and social impacts have financial
consequences. Hence, we take them into account in our assessment of how well
boards have protected shareholders’ interests and how well management have run
the company. We also discussed the need for a common framework for reporting
on these ESG factors such that the quality, consistency and comparability of the
data is improved over time.
International Federation of Accountants 2016 Chief Executives’ Forum
Exploring the Future - New York, NY
We presented to an audience of global accounting leaders on a panel entitled
“Investor and Corporate Governance Perspectives for the Profession”. Topics
included investor expectations of key players in the financial reporting chain, the
role of regulation and market participants in driving enhancements to corporate
reporting and disclosures, and potential future topics for collaboration between
investors and the audit profession, for example as relates to sustainability
accounting. We also discussed our perspectives on global stewardship codes, audit
committees’ use of audit quality indicators, and voluntary enhanced audit committee
reporting.
Active Ownership and Responsible Leadership
11
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Market Developments and Trends
12
On February 12, 2016 the SEC responded to no-action requests from companies
seeking to omit shareholder proposals on proxy access due to existing substantial
implementation. The agency granted relief to 15 out of 18 issuers that have already
adopted “mainstream” access parameters consistent with the private ordering seen
with regards to this bylaw in the last year, namely “3/3/20/20” . The SEC still
granted the request in situations where a director being nominated through this
process was subject to closer scrutiny than those nominated otherwise. The three
cases where the relief was denied all sought to impose a higher ownership
threshold of 5% vs. the more commonplace level of 3%.
Congressional scrutiny of tax advantaged REIT spinoffs continues, with the latest
official action taking place on December 15th with the House of Representatives
voting to remove the practice. Companies that contacted the Internal Revenue
Service (IRS) prior to Dec. 7 will likely receive an exemption with the proposed spin-
off by Hilton Worldwide Holdings possibly being the last of such transactions.
Congress estimates the change could generate an additional $1.9 billion in tax
revenue in the future. The broader bill contained a number of other provisions that
Congress believes will foster more investment in the industry. Alternative means of
unlocking real estate value are already being explored with joint ventures and sale-
leaseback scenarios receiving attention.
U.S. Regulatory Developments
5
5Allowing a group of up to 20 shareholders who have held at least three percent of the outstanding
shares for at least three years to nominate up to 20 percent of the board’s directors.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Market Developments and Trends
On February 29th the Delaware Court of Chancery denied a motion to dismiss a
breach of fiduciary duty lawsuit against directors of Halt Medical in Calesa
Associates LP vs. American Capital finding that the definition of “control” is case-
specific and not predetermined at any particular level. In this situation American
Capital owned 26% of the shares of Halt Medical with the court finding that it had
control because three of the company’s six directors were appointed by American
with another having close ties to the firm. This resulted in controlling influence and
led to American allegedly being able to negotiate transaction terms that
disadvantaged other shareholders. The case raises important questions about the
independence, interests, and responsibilities of directors appointed by or
recommended by shareholders.
Governance topics of priority for forthcoming SEC review or proposals are reported
to include board diversity, climate disclosure, and clawbacks for executive
compensation. SEC Chair Mary Jo White has instructed staff to evaluate whether
greater disclosure should be required on how companies view gender or race when
considering board composition, an idea that builds on Rep. Carolyn Maloney’s
recent GAO report on the same topic. The SEC is assessing whether similar
disclosure on climate change risks would help investors make determinations about
the challenges facing companies and address calls by various investors urging
more transparency into the issue.
The volatility of the Chinese market coupled with the country’s 2016-2020 5-year
plan and its focus on innovation are sparking increased China-US M&A activity and
putting the spotlight on the importance of approval by the Committee on Foreign
Investment in the United States (“CFIUS”). An ever-present part of the US
regulatory environment, CFIUS has gained further prominence due to a number of
Chinese bids for US semiconductor companies. Congress has been increasing its
scrutiny of these deals partly due to political views on the various industrial
espionage allegations of recent years and partly due to national security and
intellectual property concerns given the key place that technology plays in both
areas. Hindering efforts to understand these bids is the fact that both Chinese
investments and the CFIUS process notoriously lack transparency, with investors
often unsure of the details of financing or risks of regulatory non-approval. Further
exacerbating these challenges is the structure of the semiconductor industry, which
often spans borders and, in particular, has a heavy production concentration in
Taiwan. Other industries are also affected – see, for example, the $2.8 billion
Philips-GO Scale Capital deal scuttled over CFIUS objections (undisclosed) and a
$43 billion proposed acquisition of the Swiss Syngenta by ChemChina likely facing
intense scrutiny over the former’s US chemical and R&D facilities.
Legislators in the Senate introduced the so-called “Brokaw Act” which would require
the SEC to make changes to its oversight of activist hedge funds. Notably, it would
shorten the 13D filing requirement from ten to two business days and require the
13
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
disclosure of short positions over 5% (with new rules on the definition of a group
and the use of derivatives). Legislators are concerned about what could be deemed
predatory activity in the space and the potential practice of tipping off investor
“allies” during the ten day period after the position is taken who can then unfairly
benefit once the stake is public. The rules around beneficial ownership disclosure
have implications that extend beyond the activist investment situations that have
been the primary focus of this discussion. From our perspective, it is important that
any changes to rules that have such a broad impact be made only after a
comprehensive review of how the current rules work, the implications of any
contemplated changes, and a conclusion that any changes would protect the
interests of shareholders. The bill faces major obstacles but with Bernie Sanders
and Elizabeth Warren as cosponsors is likely to garner media attention.
The Department of Labor released a new rule requiring disclosure of companies’
use of anti-unionization consultants. While the rule will only apply to agreements
made after July 1st it will involve naming all such relationships and the fees
involved. It will extend to all activities to discourage unionization or collective
bargaining, and require similar disclosure from entities providing advisory or other
services.
Market Developments and Trends
Following a lengthy process the Canadian Securities Administration (CSA)
published changes to the take-over bid and early warning regimes. Under the new
rules, which are now aligned across Canada, companies will have more time to
respond to bids. The change, which gives companies at least 105 days to review an
unsolicited bid, will have implications for the use of shareholder rights plans and
may add costs to a bidder’s hostile effort. Specifically, it is expected that given the
extended period there will be less appetite to allow the continuation of shareholder
rights plans past this evaluation period. Friendly bids will still be able to be
completed in the minimum 35 days.
Canadian Regulatory Developments
14
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
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some or all of the funds have not been registered with the securities regulator of Brazil,
Chile, Colombia, Mexico, Peru or any other securities regulator in any Latin American
country, and thus, might not be publicly offered within any such country. The securities
regulators of such countries have not confirmed the accuracy of any information
contained herein.
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