Global asset manager BlackRock Inc. has offered additional details on the types of discussions it will be having with companies during 2018 on key priorities like climate risk, executive compensation, board diversity and employee practices.
The commentary gives companies a preview of the types of questions BlackRock's investment stewardship team will ask on those key topics. But the commentary also reiterated BlackRock's general preference for working with companies behind the scenes and to oppose them in shareholder votes only as a last resort.
"While we are patient with companies, our patience is not infinite," BlackRock said in the commentary on its climate risk engagement, reiterating a phrase it has used in previous documents.
The commentary comes ahead of the 2018 proxy season, which typically runs from late April through early June. As of mid-February 2018, shareholders had filed nearly 430 resolutions on environmental, social and sustainability issues, according to a report released March 16 by As You Sow, the Sustainable Investments Institute and Proxy Impact.
Votes are expected on at least 335 of the resolutions. Climate change, corporate political activity and sustainability issues are expected to account for a little more than half of that total, with the rest centered on topics such as human rights, board diversity and oversight, workplace diversity and equal pay, and health issues.
Given that a large number of climate proposals in the 2017 proxy season garnered at least 40% shareholder backing, BlackRock's vote in the coming season could play a significant role. BlackRock in 2017 could have tipped the scales for 10 additional climate proposals on energy companies had it voted for them, according to a recent report.
On executive compensation, BlackRock said it expects companies to use mostly proxy disclosures to explain their practices. The asset manager said engagement with it on the issue would be most meaningful if the company already has pay-setting processes in place. BlackRock added that companies reaching out simply to gauge its support before an annual general meeting would not be useful or appropriate.
BlackRock believes compensation committees should have significant flexibility in administering programs such as executive compensation and that performance measures should be tied to creating value for shareholders and limited to factors within management's control. Companies should disclose how their incentive plans reflect their strategy, and while arbitrary caps on pay are not necessary, the plans should not encourage executives to take excessive risks, BlackRock said.
On policies for attracting, hiring and retaining employees, BlackRock acknowledged that not all companies are comfortable disclosing their practices but said it encourages them to become more transparent. In particular, BlackRock wants to hear about policies that protect employees, such as those dealing with whistleblowers, codes of conduct and equal employment opportunities, according to its commentary on human capital management.
The asset manager may also evaluate whether a company's policies create a healthy culture and prevent unwanted behaviors, how boards and employees are compensated "as it relates to diversity," whether board members have visited factories and other places where the company operates, and whether the company links its employee policies to executive compensation to promote board accountability.
BlackRock outlined how having a board representing more than one gender and ethnic background leads to better decisions and sets a tone at the top of a company that can attract employees. BlackRock in February wrote all Russell 1000 companies that had fewer than two female directors and asked them to explain why. BlackRock in the March 15 commentary warned it could vote against directors on boards that do not take action to ensure they are diverse "without a specific and credible explanation."
"A new mindset may also be necessary for some companies, particularly to accept that board diversity is a performance imperative," BlackRock said in board diversity commentary.
On climate issues, BlackRock said that for companies "most directly impacted by climate change" it expects all board members to be informed of the climate risks to their business. And it promised to continue pushing for climate disclosures, particularly in light of the recommendations the Task Force on Climate-related Financial Disclosures made in 2017.
BlackRock also commented on the need for companies to have a long-term strategy, purpose and culture. BlackRock noted that companies often have different definitions of what constitutes a long-term strategic framework. Moreover, while the framework may only evolve slightly over time, it will help shareholders understand how management has changed.
"A good understanding ensures investor support for management even when events have resulted in the company missing projected targets and having to deviate or modify implementation plans," BlackRock said.