BlackRock Investment Stewardship Annual Report 2020
OVERVIEWInvestmentStewardshipAnnual ReportSeptember 2020SCROLLBY THE NUMBERSOUTCOMESAPPENDIX
We advocate for robust corporate governance andthe sound and sustainable business practices coreto long-term value creation for our clients.This report, part of our commitment to transparency in our investment stewardship activities, complements our July report,Our approach to sustainability. Our goal is to provide clarity and insight to our clients, the companies they are invested in,and our other stakeholders about our approach to investment stewardship and environmental, social, and governance (ESG) issuesof focus. These considerations have never been more critical to long-term investors given the challenges societies face in addressingthe immediate impacts on communities and the economy from the COVID-19 pandemic, and more deep-seated issues of racial andsocial equality, climate change, and economic resilience.Our Annual Report reporting period is July 1, 2019 to June 30, 2020, representing the Securities and Exchange Commission’s (SEC)12-month reporting period for U.S. mutual funds, including iShares.2
Reportcontents0001020304ForewordOverviewBy the numbersEngagement andvoting outcomesAppendixOur fiduciary responsibilityHeld companies accountableBoard qualityProposal terminology explainedMore engagements than ever beforeAccountability and board qualityOverview of key publicationsLeadership in unprecedented timesVoting by select marketEnvironmental risksand opportunitiesExpectations of boards andexecutive leadershipEnhanced disclosure buildsunderstandingStewardship in 2020 and beyondOur stewardship prioritiesExpanded the reachof our engagementsBusiness as (un)usualIntensified focus on sustainabilityEnhanced transparencyGlobal reach and local presenceCorporate strategy andcapital allocationHuman capital managementCompensation that promoteslong-termismBlackRock’s 2020 PRIassessment report and scoreEngagementsIndustry affiliationsand membershipsPublic policy consultations2020 annual engagementand voting statistics3
Foreword“BlackRock Investment Stewardship (BIS) plays a fundamentalrole in the activation of BlackRock’s purpose of helping moreand more people experience financial well-being.”Purpose, sound governance, and strong leadershipSandy BossGlobal Head of Investment StewardshipBlackRock Investment Stewardship (BIS) plays a fundamental role in the activation of BlackRock’s purposeof helping more and more people experience financial well-being. Consistent with the firm’s fiduciary duty,we engage with companies to advocate for the sound governance and business practices that drive thesustainable, long-term financial returns that enable our clients to meet their investing goals.Our expectations of boards of directors and executive management are higher than everWe are a long-term shareholder in the companies in which our clients are invested. We look to boards andexecutive management to serve the interests of long-term shareholders and other stakeholders.Our active and ongoing dialogue with the leaders of these companies gives us a valuable perspective on thebusiness challenges they face and their strategies for overcoming them. This very difficult year has providedthe clearest demonstration yet that strong, purposeful leadership is essential to a company’s resilience andability to recover from shocks and disruptions.4
For this reason, we take a firm line in holding accountablethe management and boards of directors of thesebusinesses when we do not see sufficient progress onthe issues that matter in creating sustainable, long-termvalue for our clients, who are the ultimate owners ofthese companies.This year, BIS opposed the re-election of over 5,100directors — more than ever before — sending a strongsignal of concern when companies did not makesufficient progress on issues that are central to long-termvalue creation. We raised questions on board quality,taking voting action against directors for lack ofindependence on the board, insufficient board diversity,and overcommitment. We also held directors to accountfor not meeting our expectations on climate riskmanagement or disclosures, and for managementand compensation policies inconsistent with sustainablelong-term financial performance.Engaging corporate leaders has never beenmore importantThis year BIS had over 3,000 in-depth conversations withcorporate leadership — a record number and an increaseof more than half over last year. In our more than 1,000engagements on corporate strategy and 400 engagementson the impact of COVID-19, we found many companies tobe fundamentally re-examining their social and economiccontract with their stakeholders, placing them at the heartof their recovery strategy. Increasingly, companies shareour conviction that a strategy founded upon a clearlyarticulated purpose will generate sustainable value,and be rewarded by more patient, long-term capital.Our commitment to Investment Stewardshipcontinues to grow even furtherInvestor and societal expectationscontinue to riseWhen I arrived at BlackRock as Global Head of InvestmentStewardship in May, I joined the largest and most globalstewardship team of any asset manager in the world. Overthe last few months, I have been working closely — albeitvirtually — with my colleagues, as well as spending timemeeting with clients and portfolio companies. I have beenimpressed by the way our team has engaged thoughtfullywith company leaders facing unprecedented challenges,while maintaining an unwavering commitment to ourfiduciary duty. I am also energized by the team’scommitment to constantly improve and expand ourstewardship efforts, in order to improve governancestandards worldwide and help our clients achieve theirlong-term investment goals.The significant social and economic dislocation causedby COVID-19 has further brought to the fore the need forthe private sector to take a more active role in tacklingglobal challenges. Climate change, social and racial equity,and demographic and technological shifts all exposecompanies to material business risks, which in turn presentrisks to the long-term value of our clients’ investments.A priority for us in 2020, in line with the commitment madeto our clients in January, has been to increase transparencyaround our stewardship work. To this end, I am pleased toreport that we published 45 vote bulletins on high profilevotes as of August this year, four and a half times as manyas in the prior three years combined. Furthermore, weinitiated quarterly disclosures of our engagement activityand voting record, and published KPIs for each of ourengagement priorities, mapping them to the UNSustainable Development Goals. We continue to investin the stewardship capabilities our clients depend uponto look after their interests in the companies in which theyare invested. We will keep pushing to drive progress ontransparency around stewardship.In the year ahead, we anticipate more engagement andvoting to be focused on the extent to which companies areaddressing these issues within their businesses. We arecurrently reviewing our engagement priorities and votingguidelines and will provide more detail in the comingmonths, including how we intend to reflect them in ourvoting actions in the next proxy season. We will beengaging with corporate leaders on how they plan to adapttheir strategies and business practices to enhance theirresilience. And we will be looking to companies to explainthe difficult choices they have had to make and how theyhave balanced the interests of their various stakeholders.We expect a year of continuing disruption and uncertainty.Yet we remain convinced that companies focused on theirpurpose, with a credible strategy to deliver for all theirstakeholders, will be well-positioned to create sustainable,long-term value for our clients.5
OVERVIEWOverviewBY THE NUMBERSOUTCOMESAPPENDIX
BlackRock InvestmentStewardshipOur fiduciary responsibilityEngagementBlackRock Investment Stewardship’s (BIS) activities area crucial component of our fiduciary duty to our clients.Investment stewardship is how we use our voice as aninvestor to promote sound corporate governance and businesspractices to help maximize long-term shareholder valuefor our clients, the vast majority of whom are investing forlong-term goals such as retirement. In addition to directdialogue with the companies in which our clients invest,we help shape norms in corporate governance, sustainability,and stewardship through active participation in private sectorinitiatives and the public policy debate. In the reporting yearfrom July 1, 2019 to July 30, 2020, we responded formallyto seven policy consultations and spoke at more than180 events to advance sound governance and sustainablebusiness practices.Promoting sound corporate governance is at the heartof our stewardship program. We believe that high-qualityleadership and business management is essential todelivering sustainable financial performance. That is whywe focus on board quality, effectiveness, and accountabilityacross the broad universe of companies globally thatour clients are invested in.Engagement and voting are the two most frequently usedinstruments in BIS’ stewardship toolkit.is how we build our understanding of a company’sapproach to governance and sustainable businesspractices, and how we communicate our views andensure companies understand our expectations.Votingis how we hold companies accountable when theyfall short of our expectations. Our voting takes twoforms: we might vote against directors or othermanagement proposals, or we might vote to supporta shareholder proposal.7
More engagementswith more companiesthan ever beforeIn the 2019-20 reporting period, we had moreengagements* with more companies than ever before,covering 61% by value of our clients’ equity investments.Where companies fell short of our expectations and werenot responsive to our feedback, we voted against keyitems of business on the shareholder meeting ballot.As shown in the “By the numbers” section, we heldcompanies accountable for not acting in the interests oflong-term shareholders by voting against at least onemanagement proposal at 37% of the approximately16,200 shareholder meetings at which we voted.61%of the value of our clients' equityassets engaged37%of shareholder meetings at which we votedincluded votes against one or moremanagement recommendations*BlackRock counts only direct interaction as an engagement. We also write letters to raise companies’ awareness of thematic issues on which we are focused or changes in policy,but this outreach is considered distinct from engagement as it is difficult to monitor the effectiveness of letter writing without direct interaction.Maximizing long-termvalue for shareholdersWhen we vote against a company, we do so with a singular purpose: maximizing long-term value for shareholders. There aretwo main categories of our voting actions: we might vote against directors — or other management proposals — or vote to supporta shareholder proposal. As we discuss below, we employ votes against directors more frequently since that is a globally availablesignal of concern. ESG shareholder proposals, while often non-binding and less common outside of the U.S., can garner significantattention and send a strong public signal of disapproval. BIS may support shareholder proposals that address issues material toa company’s business model, which need to be remedied urgently and that, once remedied, would help build long-term value.In our assessment, 15% of the 1,087 ESG shareholder proposals on which we voted this year met these criteria and resultedin our support for such proposals.8
The importanceof leadership inunprecedentedtimesThe fundamental reshaping of finance that Larry Finkwrote about in his letter to CEOs in January has beenbrought front and center by the COVID-19 pandemic.Both climate change and the pandemic have enormousimplications for society and the global economy. In thecase of the pandemic, the worst impacts are alreadybeing borne by the most vulnerable in our communitiesand by the countries and economies least able to weatherthem. Climate change, if not managed, threatens to havea similarly disproportionate effect, exacerbating inequalityand associated unrest.For many companies, COVID-19 has created near-termexistential challenges. Companies were plunged intoan unprecedented test of their operational resilience,focused on ensuring the health and safety of theirworkforce while managing business continuity challengesand global supply chain disruptions at a scale neverimagined. Financial resilience was, and remains,a pressing issue for many companies, with revenuesin some industries struggling.Given the unprecedented circumstances, we aimed to beconstructive and support companies on proposals outsideour normal governance policies, such as virtual shareholdermeetings, supporting poison pills, dividend cuts, off-cyclerevision of executive pay, and authorization for additionalfinancing without shareholder approval. Companies willhave to justify these difficult choices in their 2020 reportingand explain how they weighed their decisions in relation tobalancing the interests of investors, employees, customers,suppliers, and communities.400 engagements where we discussedthe impact of COVID-19In the immediate response period, we were able to besupportive as companies sought flexibility from investorsto weather the initial storm. In the first half of 2020,our Investment Stewardship team had more than 400engagements where we discussed the impact of COVID-19.9
Expectations ofboards and executiveleadershipOur investment stewardship efforts have always startedwith the board and executive leadership: it is their roleto look after the interests of investors and we look to themto meet the expectations we set out. If we are not satisfied withtheir decisions, we then hold them to account with our vote.We set out in our market-specific voting guidelines clearexpectations of directors to ensure boards have the diversity,capabilities, and independence to effectively overseemanagement and help drive long-term value creation.We opposed the re-election of over 5,100 directors dueto concerns that these characteristics were lacking or thatthe actions taken by the board were not aligned with theinterests of long-term shareholders. We expect boards to have a sufficient degree of directorindependence to look after the interests of all shareholdersand at least one independent non-executive director to beaccessible to shareholders. We voted against managementmore than 1,700 times for lack of director independence,with 1,000 votes against in Asia where controlling state orprivate shareholders can undermine the independenceinstitutional investors are seeking. We have long engaged on board diversity, includingdirectors’ personal characteristics and professionalexperience, as beneficial to good governance and effectivedecision-making. This year, we voted against managementmore than 1,500 times for insufficient diversity. We haveseen significant improvements in gender diversity in theRussell 1000 and the STOXX 600. Smaller companies andthose with more concentrated ownership are lagging, butwe expect more progress in the future. We are increasinglylooking to companies to consider the ethnic diversity oftheir boards, as we are convinced tone from the top mattersas companies seek to become more diverse and inclusive. We have high expectations for directors to avoidovercommitment and ensure that they have the capacityto fulfill their duties – expectations proven out by theintensification of demands on directors’ time during theCOVID-19 crisis. Our votes against directors for beingovercommitted have increased to over 700 this year, upfrom 430 two years ago. While sitting CEOs are reducingtheir non-executive commitments, we need to see moreprogress and focus from non-executive directors. We are increasingly voting against management onexecutive pay proposals, up from 15% to 16% this year,or nearly 1,100 votes against management. We votedagainst compensation committee members at morecompanies in the U.S. and UK than in any other markets.Our votes against proposed equity incentive plans incertain markets have fallen as a result of companiesmaking a stronger connection between rewards andperformance. Looking ahead, we are sensitive to theneed for compensation committees to reflect stakeholdermatters in pay determinations, particularly when companieshave received government support. Over the past year, we have also voted against managementto protect the rights of minority shareholders, such asour clients. In many markets in which BlackRock’s clientsare invested, it is common to have a controlling shareholderor group of shareholders. These may be founders or theirfamilies, government entities or strategicallyaligned investors. The economic interests of the controlling shareholdersare sometimes equivalent to the voting rights but oftenthis is not the case. We voted in support of six out of sevenshareholder proposals to introduce a one share, one votestandard. Further, we voted against over 300 proposals toapprove related party transactions on the grounds that theywere not aligned with the interests of minority investorssuch as BlackRock’s clients.10
Enhanced disclosurebuilds understandingWe asked in January that companies publish reportsaligned with the recommendations of the Task Force onClimate-related Financial Disclosures (TCFD) and theSustainability Accounting Standards Board (SASB) standards.Consistent with the TCFD’s recommendations, this shouldinclude a plan for operating under a scenario where globalwarming is limited to less than two degrees Celsius.We believe the TCFD framework’s four pillars — Governance,Strategy, Risk Management, Metrics and Targets — areapplicable to corporate reporting of all business relevantor material environmental and social risks and opportunities.SASB’s sector-specific standards inform the metrics pillarof the framework. These reporting tools help companiesdemonstrate that they have integrated the managementof material environmental and social factors into theirstrategy and operations.We have been engaging companies about sustainablebusiness practices for many years and believe TCFD- andSASB-aligned reporting will provide the information investorsneed to take better informed investment and stewardshipdecisions, supporting more efficient capital markets. We areencouraged by the momentum building behind these tworeporting tools and the recognition amongst practitioners —investors, companies and their advisors, and policy makers —of the need for convergence to establish a globally recognizedsustainability reporting standard.Notably, there has been a nearly 140% increase in companiespublishing SASB-aligned reports so far in 2020 over calendaryear 2019,* of which 40% are based outside the U.S.We are committed to being transparent with companies,our clients, and other stakeholders about our investmentstewardship activities. We publish our governance principlesand voting guidelines to help companies understand ourexpectations as a long-term shareholder on behalf of ourclients. We define engagement priorities each year to alertcompanies and clients to our areas of focus. As we outlinein the following sections, our investment stewardshipengagement focuses on companies that we believe may notbe acting in the long-term interests of shareholders.In January, BlackRock wrote to clients about how we aremaking sustainability central to the way we invest, managerisk, construct portfolios, design products, and executeour stewardship responsibilities. This commitment is basedon our conviction that climate risk is investment risk:a changing climate impacts all aspects of society and theeconomy globally. We believe that sustainable businesspractices, and sustainability-integrated portfolios, canproduce better l
BlackRock Investment Stewardship’s (BIS) activities are a crucial component of our fiduciary duty to our clients. Investment stewardship is how we use our voice as an investor to promote sound corporate governance and business practices to help maximize long-term shareholder value for
BlackRock Corporate governance and proxy voting guidelines for European, Middle Eastern, and African securities 3 These guidelines should be read in conjunction with the BlackRock Investment Stewardship Global Principles. Introduction BlackRock, Inc. and its subsidiaries (collectively, “BlackRock”) seek to make proxy voting decisions to achieve the outcome
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