Money managers increasing activism on governance — but quietly

Investment managers are stepping up their corporate governance activity, although they are doing so behind closed doors and not through high-profile proxy-voting campaigns.

BlackRock Inc. and The Vanguard Group Inc. are among the money managers increasing their governance activism.

A BlackRock initiative seeks to take a leadership role away from proxy-advisory firms.

Investment advisers' activity, however, takes place confidentially through discussions about corporate governance concerns, including executive compensation.

Executives of money management firms decline to identify specific companies. They think they can accomplish more in improving corporate governance through private discussions with company managements and boards than through high-profile proxy-voting activity, such as introducing shareholder proposals.

“I think that the single biggest change has been a much higher level of engagement or communication with the companies on governance issues whether initiated by them or by us” in advance of annual meetings, said Michelle Edkins, San Francisco-based managing director and global head, corporate governance and responsible investment, for BlackRock.

But one thing hasn't changed.

“We have not filed proxy proposals in the past and don't expect to (do so) this year,” said Glenn Booraem, principal and head of corporate governance at Vanguard, Malvern, Pa. “I would characterize our program as one of engagement,” guided by corporate governance principles Vanguard has developed, Mr. Booraem said.

Vanguard this year plans to engage with some 500 companies, mostly based in the U.S., he said.

Like Vanguard, Ms. Edkins said BlackRock doesn't file shareholder proposals, largely because its size enables it generally to have private conversations with companies.

“In our experience (private engagement) has a fair degree of traction with management. And we can raise (an) issue without having to dictate how management should address it,” she said. “In a way, that's always the weakness of the shareholder proposal route.”

Ms. Edkins said, “We've had a really positive response” to a January letter about corporate governance that Laurence D. Fink, BlackRock CEO, sent to some 600 companies worldwide in which the investment adviser has very large holdings on behalf of its clients, half of which are in the U.S.

“Companies have consistently said it's really helpful to be asked to speak with our mainstream investors.” Ms. Edkins said.

Mr. Fink in the letter encourages “those companies to engage with shareholders before they engage with proxy advisers,” Ms. Edkins said.

BlackRock believes companies should understand shareholder viewpoints on corporate governance issues “rather than focusing on just getting a green light” from proxy-advisory firms, she added.

“It is not a criticism of the proxy advisers,” Mr. Edkins said. “They are really an important part of the process and help us identify the companies that we should be focusing our efforts on.”

In this proxy season, Ms. Edkins pointed out, “The level of engagement has increased.” She estimates BlackRock's engagements with companies in which it invests is up 10% to 15% from last March.

BlackRock expects to engage with between 1,000 and 1,500 companies globally, about 40% of them in the United States.

“I think a lot of practitioners would point to that (rise as) having been triggered by the introduction of say-on-pay resolutions,” giving shareholders a non-binding vote on whether to ratify the compensation of the CEO and others in top executive management, Ms. Edkins said.

Against vote

Even though say-on-pay is helping BlackRock engage with companies, the firm opposed giving shareholders a vote on executive compensation. “We actually think this is a matter for boards to decide, and if shareholders don't agree that the board has used its judgment wisely, then we (shareholders) can vote against directors or withhold our vote from directors,” Ms. Edkins said.

“The interesting side effect of the introduction of say-on-pay has been that companies have really made a big effort to talk with shareholders directly because of sensitivity of losing that vote.”

While the conversation starts on compensation structures, it often leads to other issues regarding board effectiveness, Ms. Edkins said. Pay policy “is a window on other aspects of the board.”

Executive compensation, often initiated by corporate say-on-pay concerns, drives a lot of Vanguard's discussions with companies, Mr. Booraem agreed.

“We"ve seen (discussions) continuing to rise as companies are doing more outreach driven to some degree by say-on-pay but (also) a genuine growing interest in responding to shareholder concerns on governance,” Mr. Booraem said.

Vanguard and BlackRock use engagement with corporate boards and management to have continuing conversations about issues.

Things that “support the financial performance — like risk controls, like good employee engagement, like relationships with regulators ... tends to support superior long-term performance by companies when (all) that is done well” over time, Ms. Edkins said.

Vanguard's corporate governance principles “serve as a great catalyst to put issues on the table that weren't necessarily on the (proxy-voting) ballot,” Mr. Booraem said.

Vanguard, which has a corporate governance group of about a dozen people, talks with executives at many companies on an ongoing basis to establish a relationship with company executives and directors to identify areas of corporate governance concerns, Mr. Booraem said.

“A continuing ongoing engagement (is more productive) than having an engagement driven by a recommendation by a proxy-advisory service or something like that,” Mr. Booraem said.

Vanguard's “single biggest topic of conversation tends to be compensation,” Mr. Booraem said. And with the advent of say-on-pay, “companies are paying more attention to shareholders” about pay issues.

In that area, Vanguard seeks to understand how the opportunity for executives to earn pay incentives “translated to operating results of companies,” Mr. Booraem said.

“Our fundamental view is that pay should reflect relative performance and that pay plans should be structured to align the interest of executives with other employees and with us shareholders.”

BlackRock's global corporate governance team is part of the company's investment function as opposed to the compliance or legal department, Ms. Edkins noted.

“We think good governance adds value long-term,” she added.

— Contact Barry B. Burr at bburr@pionline.com