Guidelines, reports and position papers

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Statements on stewardship

UK Stewardship Code

Eumedion Best Practices for Engaged Share-Ownership

Japanese Stewardship Code:   English | Japanese

Taiwan Stewardship Code: Stewardship Principles for Institutional Investors

2018 Priorities

With an increased level of interest in our team’s work, we published last year our engagement priorities for 2017-2018. We have always had priorities, based on our observation of market developments and emerging governance practices. We published them to provide more information to clients, companies and colleagues on issues our team will focus on over the period and how we will engage companies on their governance. Engagement on these themes, particularly where we believe a company could evolve its practices, may require several meetings over a number of months, so we maintain our focus for at least two years. We engage on the range of other governance and voting matters as well
but these are our priorities.

Key points

Board composition, effectiveness, diversity, and accountability remain a top priority.
Board review of corporate strategy is key in light of shifting assumptions.
Executive pay policies should link closely to long-term strategy and goals.
Enhance understanding, through consistent disclosures, of the processes each company has in place to manage climate risks.
In a talent constrained environment, a high standard of human capital management is a competitive advantage.

BlackRock, as a fiduciary investor, undertakes all investment stewardship engagements and proxy voting with the goal of protecting and enhancing the long-term value of our clients’ assets. In our experience, sustainable financial performance and value creation are enhanced by sound governance practices, including risk management oversight and board accountability.

It is the responsibility of BlackRock’s Investment Stewardship team to engage with portfolio companies to understand their approach to corporate governance, including the management of relevant environmental and social factors. The team is comprised of over 30 specialists who engage across all geographies (with team members in New York, San Francisco, London, Tokyo and Hong Kong), taking a local approach with companies while benefiting from global insights. It is positioned as an investment function and collaborates closely with BlackRock’s more than 125 investment teams to ensure team members have a long-term value mindset, engaging with companies irrespective of whether a holding is in active or index-tracking portfolios, or both. As a significant number of our clients invest through index-based strategies, engagement is an important mechanism to provide feedback or signal concerns about factors affecting long-term performance, absent the option to sell.

Many of our engagements are triggered because companies have not provided sufficient information in their disclosures to fully inform our assessment of the quality of governance, including the exposure to and management of environmental and social factors. We ask companies to review their reporting in light of their investors’ informational needs. In our view, companies that report only to meet the regulatory disclosure requirements are missing a prime opportunity to more comprehensively engage new and existing investors about how effectively a business is led and managed. Where reporting requirements are silent on an emerging issue, we believe it is important for companies and investors to develop disclosure guidelines.

We seek to engage in a constructive manner. Our aim is to build mutual understanding and ask probing questions, not to tell companies what to do. Where we believe a company’s business or governance practices fall short, we explain our concerns and expectations, and then allow time for a considered response. As a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite - when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations.

BlackRock’s paper “Exploring ESG: A Practitioner’s Perspective” provides insight into our views on environmental, social, and governance (ESG) factors and demonstrate the firm’s focus on the impact they can have on long-term value. Our Chairman and CEO, Larry Fink, in his 2018 annual letter to CEOs (as in prior year CEO letters) highlighted our view that a company’s ability to manage ESG factors relevant to its business is one signal of the leadership that is essential to sustainable growth and thus a company’s long-term prospects.

Each year there are some engagement themes that we prioritize. Our priority themes for 2018 are a continuation of those identified last year and are set out below. We hope that highlighting our priorities will help company boards and management prepare for engagement with us. Some governance issues are perennial, such as board quality and performance, although the areas of focus may change over time.  These will always be a core component of the Investment Stewardship team’s work. Other priorities are evolving and are informed by regulatory and other market developments.

We strongly encourage companies to provide a detailed agenda when sending us a request for engagement. In practice, we assess whether to initiate an engagement or accept an invitation to engage with individual companies based on a range of material factors including our thematic priorities, level of concern on specific governance issues, observation of market events, and assessment that engagement will contribute to outcomes that protect and enhance the economic value of our clients’ investments.

Governance

Board composition, effectiveness, and accountability remain a top priority. In our experience, most governance issues, including how environmental and social factors are managed, stem from board leadership and oversight. We will encourage engagement protocols that foster constructive dialogue including with independent directors in those situations where a director is best placed to explain and justify the company’s approach. We will seek to better understand how boards assess their performance and the skills and expertise needed to take the company through its future (rather than prior) multi-year strategy. In that context, we want to understand the board’s position on director responsibilities and commitments, turnover, succession planning and diversity. More specifically, over the coming year, we will continue to engage companies to better understand their progress on improving gender balance in the boardroom. BlackRock recognizes that diversity has multiple dimensions, including personal factors such as gender, ethnicity, and age; as well as professional characteristics, such as a director’s industry, area of expertise, and geographic location. Diverse boards make better decisions. If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness. Further, we will encourage governance structures that enhance accountability (e.g. proxy access in the U.S.), limit entrenchment (e.g. regular election of directors and board evaluations), and align voting rights and economic interests (i.e. one share, one vote).

The concept of the “climate competent board” has surfaced in recent years. For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting the long-term strategy and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary. Where we have concerns that the board is not dealing with a material risk appropriately, as with any other governance issue, we may signal that concern through our vote, most likely by voting against the re-election of certain directors we deem most responsible for board process and risk oversight.

Corporate strategy for the long-term

For several years we have asked companies to articulate their strategic frameworks for long-term value creation, to affirm that their boards have reviewed those plans. Investors expect the board to be fully engaged with management on the implementation of the strategy, particularly when it needs to pivot in light of unanticipated developments. This demonstrates to investors that boards are engaged with the strategic direction of the company.

As noted in Larry Fink’s 2018 annual CEO letter, corporate strategy disclosures should clearly explain a company’s purpose, i.e. what it is in business to do. Companies that better articulate their purpose are more likely to have engaged employees, loyal customers, and other supportive stakeholdersi.

Companies should succinctly explain the long-term strategic goals management is working towards, the milestones that will demonstrate progress, and any obstacles anticipated or incurred. Each year this explanation should be refreshed and adapted to reflect the changing business environment and how it might affect how a company prioritizes capital allocation, including capital investments, research and development, technological adaptation, employee development, and capital return to shareholders. In this context, we are also interested in understanding how a board addresses shorter-term goals, such as those focused on quarterly performance.

Compensation that promotes
long-termism

We will be particularly focused on how boards establish performance metrics and hurdles in the context of the aforementioned long-term strategy setting. We expect executive pay policies to use performance measures that are closely linked to the company’s long-term strategy and goals. This should ensure that executives are rewarded for delivering strong and sustainable returns over the long-term, as opposed to short-term hikes in share prices. To this end, we’ll seek clarity on the company’s balance and prioritization between “input” metrics that are within management’s control relative to “output” metrics such as earnings per share or total shareholder return. Where pay seems out of line with performance, we expect the company to provide detailed justification in its public disclosures and may engage with independent directors where concerns persist. We may ask the board to explain the extent to which it considers internal pay equity and the broader macroeconomic context when setting pay. We may vote against the election of compensation committee members in instances, including but not limited to, where a company has not persuasively demonstrated the connection between strategy, long-term shareholder value creation and incentive plan design.

Disclosure of climate risks

The BlackRock Investment Institute has published two papers – "The Price of Climate Change – Global Warming’s Impact on Portfolios” and “Adapting Portfolios to Climate Change”– on climate change as an investment consideration, to which the Investment Stewardship team contributed. That work enhanced our understanding of the complexity companies and investors face in relation to climate change. It has also informed our engagement with companies on the anticipated impact of climate change on their business models and operations over time. We believe that enhanced, meaningful disclosures are an important step towards building understanding of the impact on individual companies, sectors and investment strategies. Given climate risk is a universal issue, we believe disclosure standards should be developed that are applicable to listed companies across each market and, ideally, that are globally consistent.

To that end, BlackRock continues to be a member of the industry-led Financial Stability Board Task Force on Climate-related Financial Disclosures (“TCFD”). The TCFD published in June 2017 its recommendations around four thematic areas that represent core elements of how organizations operate – governance, strategy, risk management, and metrics and targets. This framework offers companies and investors a starting point to assess, report, and price climate-related risks and opportunities. In our view, the TCFD recommendations, which include sector-specific supplemental guidance, provide a relevant roadmap for companies and help achieve comparability and consistency of reporting. Over the course of the coming year, we will continue to engage companies most exposed to climate risk to understand their views on the TCFD recommendations and to encourage them to consider using this reporting framework as evolves over time.

Human capital management

Most companies BlackRock invests in on behalf of clients make the point in their public disclosures that their success is heavily dependent on their employees or talent. Often they also report that they are operating in a talent constrained environment, or put differently, are in a war for talent. It is therefore important to investors that companies establish themselves as the employer of choice for the workers on whom they depend. A company’s approach to human capital management – employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, and supply chain labor standards, amongst other things – will vary across sectors but are a factor in business continuity and success. In light of evolving market trends like shortages of skilled labor, uneven wage growth, and technology that is transforming the labor market, many companies and investors consider having a high standard of human capital management a competitive advantage. In our engagement on these factors, we seek to ensure companies are adopting the sound business practices likely to create an engaged and stable workforce. As part of the engagement, we are interested to know if and how boards oversee and work with management to improve performance in these areas. Such engagement also provides a lens into the company’s culture, long-term operational risk management practices and, more broadly, the quality of the board’s oversight.

A copy of the BlackRock Investment Stewardship team’s 2018 engagement priorities can be found on our website here: https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities

i “Culture of Purpose – Building business confidence; driving growth – 2014 core beliefs & culture survey” available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/about-deloitte/us-leadership-2014-core-beliefs-culture-survey-040414.pdf

Reports

Letters

BlackRock’s approach to companies that manufacture and distribute civilian firearms

The recent tragedy in Florida has put a spotlight on the role of companies that manufacture and distribute civilian firearms. Today, BlackRock published an update on how we are approaching this issue.

Larry Fink’s annual letter to CEOs – 2018

Each year BlackRock’s Chairman and CEO, Larry Fink, sends a letter to the CEOs of leading companies in which our clients are shareholders on issues relating to corporate strategy and long-termism. Larry Fink’s 2018 letter points to society’s rising expectations for companies and the importance of BlackRock Investment Stewardship’s (BIS) corporate governance and engagement efforts which seek to maximize long-term value creation on behalf of our clients.

Executive Remuneration Letter

As we published our new guidelines on executive remuneration in EMEA in January 2017, we sent this letter to the chairman of the board of the top 300 listed companies in the United Kingdom. The letter explains the rationale for publishing the new guidelines and highlights the main updates. The guidelines were designed both to provide companies with a set of best practices and to help remuneration committees assess our support for their pay policies.

Commentaries

BlackRock Investment Stewardship’s approach to engagement on climate risk

BlackRock Investment Stewardship’s approach to engagement on strategy, purpose and culture

BlackRock Investment Stewardship’s approach to engagement on diversity

BlackRock Investment Stewardship’s approach to engagement on human capital

BlackRock Investment Stewardship’s approach to executive compensation 

Position papers

Voting Rights and Index Inclusion

BlackRock is a strong advocate for equal voting rights for all shareholders. It is with this view in mind that we share a potential solution for voting rights and index issues.

Exploring ESG: A Practitioner’s Perspective

Environmental, social, and governance (ESG) factors are an increasingly prominent factor in determining the long-term value of a company. ESG data spans a range of issues, including measures of company carbon emissions, labor and human rights policies, and corporate governance structures. In this ViewPoint, we define different ways that investors can integrate ESG factors in the investment process, outline our views on how ESG factors contribute to long-term value, and describe the current landscape of ESG disclosure initiatives across organizations and regulatory bodies.

Le dialogue actionnarial en France

BlackRock's fiduciary responsibility drives our commitment for shareholder dialogue in France. Direct dialogue between board members and long term shareholders would help to build trust and develop mutual understanding.

21st Century Engagement Guide

We provide tools, options and ideas for U.S. institutional investors on engaging with companies and policymakers on sustainability issues. The guide includes tactics and case studies from 37 engagement experts spanning six countries.

Levelling the Playing Field on Sustainability Risk

Sound practices in relation to the material environmental and social aspects of a company’s business can be signal of operational excellence and management quality.

Sustainability Listing Requirements - Bursa Malaysia

Bursa Malaysia issued a consultation paper relating to proposed amendments to listing rules relating to sustainability statements in annual reports and the Sustainability Reporting Guide. Read our submission.

Gender Diversity in Australia - The Ugly, The Bad and The Good

BlackRock released its fourth research piece on diversity at ASX 200 companies. The release of the research also coincided with the launch of the “30% Club in Sydney and Melbourne. While the research showed that ASX companies will reach 30% women before 2019, a number of issues still remained.

Key Considerations in the Debate on Differentiated Voting Rights

As the debate on differentiated voting rights is gaining momentum, it's important to understand the risks associated with this practice and the reasons why BlackRock supports the proportionality principle. We reviewed the common assumptions regarding differentiated voting rights and have proposed alternative solutions to reinforce long-termism.

Australia's Gender Policies Need to be Wound into their DNA

Not a good year for gender diversity in Australian public life. Research has shown gender diversity, but real embedded progress is hard to find. We review the 2013 annual reports of their 200 largest firms, revealing 3 key findings.

Australia’s Female-less Boardrooms

BlackRock publishes a look into Australia's female-less boardrooms. Corporate boardrooms and executive row still appear to be mostly male, which is a stark contrast with the advances made by women in the public sector.

Read public policy

BlackRock Response to the CSRC Consultation on the Revised Code of Corporate Governance | Simplified Chinese

The China Securities Regulatory Commission (CSRC) undertook a public consultation for the proposed revisions to the Code of Corporate Governance. The proposed revisions included many concrete measures towards more robust governance structures such as mandating the establishment of audit committees and enhanced disclosure requirements on environmental, social, and governance issues. BlackRock submitted a response providing constructive feedbacks on areas where consider most critical from an investor’s perspective including better transparency on governance features that are unique in China, share pledge by controlling shareholders, and better alignment between corporate social responsibilities activities and the business strategy of a company.

Open Letter Regarding Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes

The subject of dual class share companies, or unequal voting rights, has arisen as a key corporate governance concern. While this practice has been around for a long time, recent IPOs by technology companies have raised awareness of the issue. Many market participants have expressed concern about the implicit deterioration in corporate governance standards and the lack of accountability to shareholders. The issue is currently at the fore in MSCI’s consultation on the treatment of unequal voting structures in MSCI’s equity indexes where MSCI has suggested that the weighting of companies in their indexes should match the voting rights of their share structures. As discussed in Open Letter Regarding Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes, we are advocates of the principle of “one share, one vote”, however; we also understand that other structures may serve a purpose in certain circumstances. Importantly, we believe regulators and policymakers – not index providers – should be the guardians of stock exchange listing standards. In our letter, we suggest an alternate path forward.

Consultation on Corporate Governance Code of French Listed Corporations - AFEP and MEDEF

AFEP and MEDEF, two French issuers’ organizations, recently published a consultation paper, inviting comments on proposed reforms to their code of corporate governance for listed companies. BlackRock’s response (in French and English) focuses on the drafting and monitoring of implementation of the code, as we believe a wider group of stakeholders should be involved.

Consultation on Listing Regime for Companies from Emerging and Innovative Sectors - HKEX

The Hong Kong Exchanges and Clearing Limited published a Consultation Paper on a Listing Regime for Companies from Emerging and Innovative Sectors (the Consultation Paper). The Consultation Paper proposed changes to the listing regime to make the equities capital market more easily accessible for companies in the emerging and innovative sectors by relaxing rules around pre-listing financial suitability and corporate governance structure particularly in relation to variable voting rights. A number of safeguards aimed at providing shareholder protection were also proposed. Learn more in our submission.

Consultation Paper on Recommendations of the Corporate Governance Council - MAS

The Corporate Governance Council of the Monetary Authority of Singapore (MAS) released a consultation paper on its recommendations to revise the Code of Corporate Governance (Code). The recommendations were focused on updating the current Code to reinforce board competencies through provisions guiding board renewal, independence testing, and diversity. Other revisions include emphasis on disclosure of the relationship between remuneration and value creation, as well as the need for boards to consider and balance the needs of a wider stakeholder group. BlackRock submitted a response generally in support of the recommendations, with suggestions on how to further improve the existing Code.

UK Corporate Governance Reform – Department of Business, Energy and Industrial Strategy

The UK government’s Department of Business, Energy and Industrial Strategy issued a green paper posing a number of questions to stakeholders, including market practitioners, in order to consider what changes might be appropriate in the corporate governance regime. Our proposals are aimed to provide constructive outcomes, specifically in line with our core principles on corporate governance focusing on board accountability for oversight.

Response to the public consultation of the SEC of the Philippines

The Securities and Exchange Commission of the Philippines issued a public consultation on the Draft 2016 Code of Corporate Governance for Publicly-listed Companies aimed to seek reviews and comments on proposed changes to the Code of Corporate Governance. Learn more in our submissions.

Malaysian Code on Corporate Governance 2016 – Securities Commission Malaysia

The Securities Commission Malaysia issued a public consultation paper inviting comments on the proposed changes to the Malaysian Code on Corporate Governance. Learn more in our submission. The revised approach aims to encourage progression and provide greater utility for companies, and their stakeholders.

Review: Environmental, Social & Governance Reporting Guide - Hong Kong Exchanges

The Hong Kong Exchanges and Clearing Limited issued a consultation paper aimed to seek views and comments on proposed changes to the Environmental, Social and Governance Reporting Guide. The consultation paper proposed a number of recommended practices to "comply or explain". Learn more in our submission.