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Table of Contents
QUARTERLY REPORT |
▸ Engagement with Issuers and Statistics
▸ Voting Highlights and Statistics
▸ Active Ownership and Responsible
Leadership
▸ Market Development and Trends
SEPTEMBER 30, 2015
Table of Contents
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Engagement with Issuers¹
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 3rd Quarter 2015.
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
122 93 20 9 8 13 120
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
Americas Corporate Governance and Responsible Investment Group (“CGRI
Americas”) conducted approximately 121 company engagements in the third
quarter. These discussions typically focused on corporate strategy, executive
compensation, governance provisions, issues related to capital structure and
succession planning 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 small-cap, global semiconductor company to better understand the
board’s oversight during a period of strategic transition. The company discussed
the challenges of balancing short-term measures with long-term investments,
pointing to high costs of implementing strategies that have multi-year development
periods while remaining focused on the end-goal of delivering shareholder value. In
this context, we discussed the board composition, directors’ skillsets and time
commitments, and sought to understand how the compensation program aligns
executives’ interests with and drives performance towards the company’s strategic
goals. The company described its business strategy, how the board contributes in
strategy discussions, its executive compensation design, and its philosophy on
governance issues. Our engagement provided comfort regarding the board’s
oversight during this transition period. We will continue monitoring the company
during this turnaround phase.
1
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas4
A global manufacturer of communication products initiated a strategic review of its
business, partly prompted by calls from activist investors to spin off a large division.
The company described the strategic review process and emphasized that the
complexities of its various businesses must be well understood before any changes
can be made. When asked about any potential impact that the strategic review
might have on its customers, the company indicated that its roadmap of product
offerings will not be altered and said it received positive feedback from customers
about its strategic review. The company also described its approach to board
assessment and board refreshment. When asked about the company’s approach
to capital allocation, the company said that its capital program is flexible and is
designed to support either current strategies or imperatives that may arise out of
the strategic review process.
We engaged a global provider of networking and communications technologies
about its recent leadership transition. The company described its extensive
succession planning and its efforts to execute the leadership transition smoothly in
a manner transparent to shareholders. The company articulated various
responsibilities of the key roles at the company and described the process to
identify the best candidates for these roles. The company also described the
complexities of the business and the importance of the oversight provided by its
knowledgeable board of directors. We also explored the company’s management
of human capital in the midst of such a shift and the board’s risk oversight of the
leadership transition.
3
2
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
4 The Americas Statistic Report is a reflection of 3rd Quarter 2015 and sourced from ISS Proxy Exchangeon October 1, 2015.
We engaged with a manufacturer of generic and specialty pharmaceutical products
over the course of several months regarding its attempt to fend off an unsolicited
approach by another pharmaceutical company (“Entity A”), as well as its own
simultaneous attempt to take over a third pharmaceutical company (“Entity B”). The
company maintained certain anti-takeover provisions as a result of its ex-U.S.
incorporation, following an inversion transaction earlier in the year. We discussed
the economic and strategic rationale for the respective merger proposals and also
conveyed our governance concerns. Eventually, Entity A dropped its bid for the
company. The company subsequently held a special meeting to seek shareholder
approval to undertake an acquisition of Entity B. In our view, while we understood
and supported in principle the strategic rationale of the proposed acquisition, we
identified a lack of compelling economic rationale and significant execution risks,
and we voted against the special meeting proposal. The acquisition proposal
passed at the special meeting, and the company launched its tender offer for Entity
B. We will continue to evaluate the situation throughout the tender process, in
particular the long-term implications of the company’s chosen governance regime.
1
Voting Highlights
5
In the Americas, the third quarter generally sees relatively low proxy voting volume.
Nonetheless, we continued to vote and engage around annual and special
shareholder meetings.
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 2,718 24% 7%
Canada 39 291 39% 8%
Latin and
South
America
230 1,196 48% 21%
Americas
Region Total648 4,205 34% 11%
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas6
We engaged a Canadian financial company with a dual-class share structure
regarding the company’s proposal to increase the voting power of the class of
voting shares owned by its CEO and his family (the “Family Shares”), following
significant dilution of that voting power over the three decades since the CEO
founded the company. The company highlighted its excellent long-term
performance and explained that it favors the controlled company structure to stem
the possibility of takeovers and protect long-term growth. We considered our
preference for alignment between economic and voting rights against the long-term
shareholder value the company created and the locked-in nature of the Family
Shares holdings. However, we decided to vote against the special meeting
primarily based on our reservation that the increased voting power of the Family
Shares would extend even beyond the current CEO’s leadership term. We shared
our concerns in a subsequent engagement, and the company amended the
provisions to add a shareholder ratification vote on the control structure following
the end of the CEO’s term. Given that this amendment would allow the
shareholders to oversee and mitigate potential future risks stemming from the
Family Shares structure, we supported the company’s special meeting.
2
We engaged with an industrial goods and metal fabrication company to discuss a
shareholder proposal requesting the board adopt proxy access to allow one or
more shareholders owning at least 3% of the company shares continuously for
three years to nominate up to 25% of the board. The company indicated it is
considering adopting proxy access with similar parameters. In particular, the board
is monitoring this year’s active private ordering process of proxy access, with the
intention to implement proxy access in a manner that best protects both the
company and shareholder rights. We expressed support for the plan. Given the
company’s indicated likelihood to adopt proxy access in line with our expectations,
we decided to not support the proxy access shareholder proposal at this time. The
proxy access proposal passed at the company’s AGM. We will continue to engage
with the company in the coming year as the company explores this governance
reform.
3
Last year, a US-based apparel retailer failed its say-on-pay proposal. BlackRock
had identified a pay-for-performance disconnect at the company and voted against
the proposal, as well as the compensation committee members. This year, we
engaged the company on the issue of CEO succession planning, as its CEO, after
five years of significant underperformance, was replaced by a former CEO. The
company explained that the full board oversees succession planning, but that the
compensation committee initiates the process. According to the company, this
review takes place on “at least” an annual basis toward the end of the calendar
year. We inquired as to the robustness of the process, given that ultimately, a
former CEO was brought back. The company indicated there was much discussion
around both internal and external candidates. We then explored the compensation
committee’s decision to accelerate the vesting of the outgoing CEO’s restricted
stock units four months before his departure. The company asserted that the
compensation committee had no idea that the chosen CEO transition was
imminent. We provided feedback to the company that the compensation committee
members should be held accountable for insufficient oversight of both the outgoing
CEO’s severance package and executive succession planning. At the AGM, the
compensation committee members received over 20% withhold votes.
4
The main themes for our
engagements related to voting
this quarter include M&A, proxy
access, dual-class stock
ownership structures, the
alignment of executive
compensation relative to peers
and performance, and executive
succession planning. The CGRI
Americas team also voted several
high profile proxy contests and
contested mergers.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas7
BlackRock identified a pay-for-performance misalignment at a for-profit educational
organization for the past four years. We engaged with the company at the end of
2014 and provided feedback on how the company might be able to better align pay
with performance. We also shared our preference for discussing this topic with
compensation committee members, who are accountable for setting and
overseeing management incentive plans. The company had informed us that this
information would be shared with the board. This year, we assessed that no
substantive changes were made to the company’s compensation program while
stock performance declined. Despite our previous feedback, the CEO took part in
this year’s executive compensation discussion with us. We reiterated our wish to
speak to compensation committee members and noted the continued pay-for-
performance misalignment over the past year. The company was unable to assure
us that any changes had been made since last year’s AGM. We ultimately decided
to vote against the compensation committee members and the say-on-pay
proposal.
5
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Active Ownership and Responsible Leadership
Members of CGRI 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 CGRI. 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.
Below is a list of select speaking events from the quarter, and subject matter
covered:
2015 ESG Roundtable – Toronto, Ontario
Benefits Canada convened a small group of institutional investors to discuss the
implications of Ontario’s new legislation, which in 2016 will require pension plans to
disclose their integration of environmental, social, and governance (ESG) factors.
Roundtable participants outlined factors Canada’s “Maple Revolutionaries” might
consider in developing approaches, and described a wide range of implementation
options for ESG integration. Benefits Canada will publish a report on the roundtable
during the fourth quarter.
Carolinas Director Exchange – Charlotte, NC
BlackRock presented an institutional investor perspective on corporate governance
to an audience of corporate directors, senior executives and board advisors. In a
fireside chat format, we discussed a range of issues including shareholder-director
engagement, long-termism, proxy access, the use of proxy advisors, and
shareholder activism
8
Speaking Events
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
The Humane Economy Event – New York, NY
As reported by Reuters, on September 24, Fidelity, MFS, Coller Capital, The
Humane Society and BlackRock jointly hosted an event at BlackRock’s corporate
headquarters to explore the social impacts of buying decisions on restaurants,
retailers and other consumer-focused companies. Attendees included governance
professionals, analysts, and other stakeholders from some of the world’s largest
financial institutions. The event provided finance professionals with insights into
how changes in consumer buying habits and production systems related to the
treatment of animals, the environmental and other social issues can impact
investment decisions and long-term financial performance. The event was deemed
to be the first cross-company collaboration in the financial industry aimed at
addressing the impact of animal treatment in food production.
.
Active Ownership and Responsible Leadership
9
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Market Developments and Trends
10
On August 31, forty-four U.S. senators wrote a letter of petition to Chair Mary Jo
White of the U.S. Securities and Exchange Commission (“SEC”) to require public
companies to disclose to shareholders the use of corporate resources for political
spending. The letter articulates the senators’ disagreement with the Supreme
Court’s 2010 decision in Citizens United v. FEC which “allowed unlimited and
unchecked corporate spending on campaign ads and various other political
communications.” We believe it is the duty of boards and management to
determine the appropriate level of disclosure on political activity, but monitor
situations where there seems to be either a significant potential threat or actual
harm to shareholders’ interests and where we believe the company has not
provided shareholders with sufficient information to assess the company’s
management of the risk.
U.S. Regulatory Developments
On August 24, the Federal Trade Commissions (the “FTC”) announced that activist
investor Dan Loeb’s Third Point had settled the FTC’s complaint charging violations
of the notification and waiting period requirements of the Hart-Scott-Rodino Act (the
“HSR”) related to its purchases of Yahoo! stock in 2011. The FTC charged that
Third Point acquired voting shares of Yahoo! in excess of the HSR notification
threshold and continued building a position through the date when it filed a Form
13D with the SEC. The FTC did not assess civil penalties but only sought injunctive
relief to prohibit Third Point from violating the passive investment exemption of the
HSR ACT when engaging in such activities in the future.
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Market Developments and Trends
On August 18, the U.S. Court of Appeals for the D.C. Circuit (the “court”) confirmed
its ruling to strike down part of the SEC’s Conflict Minerals Rule as unconstitutional.
The court found that requiring issuers to describe their products as “not found to be
‘DRC conflict free” in reports filed with the SEC violates the First Amendment. In
addition, the court found that stating that a product is “conflict free” or “not conflict
free” connotes moral judgment about the product and is not a factual statement.
Following the ruling, the companies do not need to identify their products as “DRC
conflict undeterminable” or “not been found to be ‘DRC conflict free”. Companies
are still required to disclose the facilities to produce the conflict minerals, the
country of origin of the minerals, and their efforts made to determine the origin of
the minerals.
On August 5, the SEC held an open meeting to adopt the recently-released final
rules requiring pay ratio disclosure. The rules require companies to disclose the
CEO to median worker pay ratio in their first full fiscal years beginning on or after
January 1, 2017. Chair White and Keith Higgins, the Director of Corporation
Finance, stressed that the rule permits substantial flexibility, including discretion to
use estimates and sampling, so that companies can use reasonable methods
consistent with the proposed rules to comply with the rules.
On July 24, the SEC Office of Economic and Risk Analysis published a working
paper on proxy access that analyses proxy access through federal regulation
versus private ordering through shareholder proposals. The paper concludes that
while private ordering does lead to a 0.5% increase in shareholder value for the
targeted firms, private ordering may indeed lead to a “second best outcome,” as the
proponents do not selectively target the firms that were expected to benefit the
most from universally mandated proxy access, and tailoring of proposal terms is
limited. The paper also found that management is more likely to challenge
proposals at firms that stand to benefit more, and that private ordering may not
efficiently deliver proxy access at the firms that need it most.
In other regulatory news, a number of business groups, including the American
Bankers Association, the U.S. Chamber of Commerce, Securities Industry and
Financial Markets Association, the National Association of Manufacturers and ten
others, sent a letter on July 2nd to Chair White and the SEC announcing the
formation of the Corporate Governance Coalition for Investor Value (the
“Coalition”). According to the letter, the mission of the Coalition is to ensure that
long-term value creation remains the foundation for managerial decision-making at
American companies, to foster a constructive dialogue among companies,
shareholders and stakeholders, and to assist policy makers and regulators,
including the SEC, to develop balanced regulations impacting corporate
governance. The Coalition made a special emphasis on its observation that
activist-led campaigns are not aligned with long-term shareholder interest, and
threaten to diminish the oversight role of boards.
11
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
On July 1, the SEC proposed a rule implementing clawback policies to recover
incentive-based compensation received by current or former executive officers in
the event of certain financial restatements. In conjunction with the proposal, the
SEC proposed to revise its disclosure rules to require that each company file a copy
of its clawback policy as an exhibit to the annual report, and in the event of a
restatement, disclose how much incentive-based compensation was subject to
recovery, how much has remained outstanding for 180 days or longer, and, if the
company decides not to recoup excess compensation as permitted, the names of
the executive officers from whom the company did not seek recovery and the
rationale for this decision.
Also on July 1, the SEC issued a concept release seeking public comment on
whether to expand disclosure requirements about audit committees. The main
focus of the concept release is on the audit committee’s responsibilities for
oversight of the independent auditor. The SEC is also soliciting public comment on
other aspects of the audit committee’s role beyond those involving the auditor,
including its oversight of financial reporting, internal controls and risk.
Market Developments and Trends
On September 10, the Toronto Stock Exchange (the “TSX”) and the Ontario
Securities Commission (the “OSC”) have adopted the amendments to the TSX
Company Manual to vary and enhance certain exemptions for issuers listed on two
or more exchanges (the “interlisted issuers”). In addition to exemptions from
transactional requirements, the amendments permit certain interlisted issuers to
apply for annual exemptions from corporate governance, director election, and
annual meeting requirements. Interlisted issuers incorporated in Canada are not
eligible for corporate governance exemptions.
On August 25, the ministers overseeing capital markets regulation in British
Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island and
Yukon published for comment a revised draft of the Capital Markets Act in an effort
to move closer to establishing a single regulator which will oversee rules to protect
investors and promote efficient capital markets in Canada under a common
standard.
Canadian Regulatory Developments
12
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
Market Developments and Trends
In July, Brazil’s securities exchange, BM&FBovespa (“Bovespa”), proposed the
State-Owned Enterprise Governance Program (the “Program”) to encourage state-
owned enterprises (“SOEs”) to meet certain corporate governance and disclosure
standards. The primary aim of the Bovespa is to re-establish investor confidence in
publically traded SOEs, especially following corruption scandals at Petrobras, in the
hopes of reducing these organizations’ cost of capital. The Program directly links
market uncertainty in SOE stocks to “deficient disclosure practices, inadequate
accountability and poor governance” at SOEs. The Program recommends that
each SOE publicize an annual corporate governance letter to investors, disclose
dividend distribution policy as well as proposals regarding the allocation of
earnings, and produce sustainability reports to disclose management strategies for
the risks and opportunities identified in the social and environmental dimensions.
Included among the new standards are requirements on setting internal controls,
standards for appointing company officers, and the separation of the CEO and CFO
roles.
Brazilian Regulatory Developments
13
CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas
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