BlackRock’s Focus on Company-Shareholder Engagement

Sep 2016

BlackRock is the world’s largest asset manager with approximately $4.6 trillion under management and is keenly focused on company-shareholder engagement. This past February, BlackRock Chairman and CEO Larry Fink sent his annual letter on corporate governance to all the CEOs at S&P 500 companies, as well as the leaders of large European corporations.

Building upon recommendations made in previous years, Fink’s letter addresses concerns such as “short-termism” and urges corporate leaders to take a longer-term perspective on planning and execution. He also suggests that companies need to clearly communicate to Wall Street the company’s strategic objectives. He included several strategies companies can pursue that will enable them to become less vulnerable to short-term influence and more successful at creating long-term value.

In sum, Fink’s recommendations and requests have the potential to influence the practices of executives, boards and IROs in a number of key areas.

Thinking Long-Term Versus Quarterly

Fink discussed the importance to BlackRock that companies resist short-term pressures and instead invest for long-term growth. He even suggested that companies could, over time, move away from quarterly guidance. BlackRock believes that companies could frame quarterly reporting as a sort of “EKG” that can be compared against a “baseline EKG” to show movement on strategic initiatives.

“Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need,” Fink wrote. “To be clear, we do believe companies should still report quarterly results – ‘long-termism’ should not be a substitute for transparency. But CEOs should be more focused in these reports on demonstrating progress against their strategic plans than a one-penny deviation from their EPS targets or analyst consensus estimates.”

Articulating Long-Term Plans

Along with asking companies to think longer term, BlackRock is asking them to provide shareholders with detailed plans each year on how they will create long-term value. BlackRock considers board input to be an essential component of the planning process, and thus requests that chief executives “explicitly affirm” that their boards have reviewed strategic plans.

“We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation,” Fink wrote. “Additionally, because boards have a critical role to play in strategic planning, we believe CEOs should explicitly affirm that their boards have reviewed those plans. BlackRock’s corporate governance team, in their engagement with companies, will be looking for this framework and board review.”

Elevating Focus on ESG Factors

Fink suggests that some companies have not paid enough attention to the risks and opportunities that environmental, social and governance factors pose. He says companies should not dismiss these factors as not “core,” when around the world we can see the importance world leaders place on them. Fink cites the Paris Accord as one example. In the end, Blackrock believes that how well or poorly a company responds to ESG issues can have definite financial implications. 

“At companies where ESG issues are handled well, they are often a signal of operational excellence,” Fink wrote. “BlackRock has been undertaking a multi-year effort to integrate ESG considerations into our investment processes, and we expect companies to have strategies to manage these issues.”

Weighing Activists’ Proposals

One reason clearly articulated plans are so important is that they allow long-term investors to have continued “faith” in a company’s vision. Without support from longer-term shareholders, a company can be more exposed to pressure from shorter-term interests, including activists. Although they think that long-term strategies should come from companies themselves instead of through proxy fights, BlackRock reports voting with activist shareholders 39 percent of the time in 2015.

“Those activists who focus on long-term value creation sometimes do offer better strategies than management,” Fink says. In those cases, BlackRock’s corporate governance team will support activist plans.

To view the full letter from Blackrock CEO Larry Fink, visit www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2