CORPORATE GOVERNANCE & RESPONSIBLE … · · 2016-04-15company’sindicated likelihood to adopt...

CORPORATE GOVERNANCE & RESPONSIBLE

INVESTMENT REPORT: AMERICAS

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.

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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


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%


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.


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


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


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


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.



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


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.


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



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


This document contains general information only and is not intended to be relied upon

as a forecast, research, investment advice, or a recommendation, offer or solicitation to

buy or sell any securities or to adopt any investment strategy. The opinions expressed

are as of October 1, 2015 and may change as subsequent conditions vary. The

information and opinions contained in this material are derived from proprietary and

non-proprietary sources deemed by BlackRock, Inc. and/or its subsidiaries (together,

“BlackRock”) to be reliable, are not necessarily all inclusive and are not guaranteed as

to accuracy. There is no guarantee that any forecasts made will come to pass. Any

investments named within this material may not necessarily be held in any accounts

managed by BlackRock. Reliance upon information in this material is at the sole

discretion of the reader. The information does not take into account individual financial

circumstances. An assessment should be made as to whether the information is

appropriate for an investor having regard to one’s objectives, financial situation and

needs.

Investing involves risk, including possible loss of principal. This material is not intended

to provide, and should not be relied on for, accounting, legal or tax advice or

investment recommendations. No part of this document may be reproduced, stored in a

retrieval system or transmitted in any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without the prior written consent of BlackRock.

No material non-public information was solicited, offered or received in the course of

the engagements described in this material. In accordance with BlackRock’s conflicts

management policy, the voting elections made by BlackRock are informed by

BlackRock’s voting policies, and all voting elections are made independently of any

relationship between BlackRock and any entity whose securities are subject to a vote.

Each client engagement is different, and the examples of engagements described in

these materials are not necessarily representative of any or all other engagements

between BlackRock and a third party or third parties.

In the EU issued by BlackRock Investment Management (UK) Limited (authorised and

regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton

Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000.

For your protection, telephone calls are usually recorded. BlackRock is a trading name

of BlackRock Investment Management (UK) LimitedIssued in Australia by BlackRock

Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523

(BIMAL), who warrants by receipt of this material that they are a wholesale client as

defined under the Australian Corporations Act 2001 (Cth). This material is intended

only for wholesale clients and this material must not be relied or acted upon by retail

clients. This material provides general information only and has not been prepared

having regard to your objectives, financial situation or needs. Before making an

investment decision, you need to consider whether this material is appropriate to your

objectives, financial situation and needs. This material has not been prepared

specifically for Australian investors. It may contain references to dollar amounts which

are not Australian dollars. It may contain financial information which is not prepared in

accordance with Australian law or practices. In Singapore, this is issued by BlackRock

(Singapore) Limited (Co. registration no. 200010143N). In Hong Kong, this document is

issued by BlackRock Asset Management North Asia Limited and has not been

reviewed by the Securities and Futures Commission of Hong Kong. For distribution in

Korea for Professional Investors only (or "professional clients", as such term may apply

in local jurisdictions). Investments involve risks. In Taiwan, independently operated by

BlackRock Investment Management (Taiwan) Limited. Address: 28/F, No. 95, Tun

Hwa South Road, Section 2, Taipei 106, Taiwan. Tel: (02)23261600. Past performance

is not a guide to future performance. This material is intended for information purposes

only and does not constitute investment advice or an offer or solicitation to purchase or

sell in any securities, BlackRock funds or any investment strategy nor shall any

securities be offered or sold to any person in any jurisdiction in which an offer,

solicitation, purchase or sale would be unlawful under the securities laws of such

jurisdiction. Not approved for distribution Japan. In Canada, this material is intended for

permitted clients only. In Latin America this piece is intended for use with Institutional

and Professional Investors only. This material is solely for educational purposes and

does not constitute investment advice, or an offer or a solicitation to sell or a solicitation

of an offer to buy any shares of any funds (nor shall any such shares be offered or sold

to any person) in any jurisdiction within Latin America in which such an offer,

solicitation, purchase or sale would be unlawful under the securities laws of that

jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that

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.

© 2015 BLACKROCK, Inc. All rights reserved. BlackRock® is a registered trademark of

BlackRock, Inc. or subsidiaries in the Untied States and elsewhere All other trademarks are

those of their respective owners. CG-0048

To learn more about how we are shaping global governance and protecting our

clients’ assets, please visit http://www.blackrock.com/corporate/en-us/about-

us/responsible-investment

http://www.blackrock.com/corporate/en-us/about-us/responsible-investment

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