By Michelle Edkins – Managing Director at BlackRock and Global Head of its Investment Stewardship team
Engagement between directors and shareholders is on the rise, admittedly from a very low base in some markets and it’s a trend we expect to endure. Why? Because there are tangible benefits to companies and investors from having direct dialogue on key corporate governance matters, in their broadest sense, including how boards oversee management’s approach to the material environmental and social impacts of the business.
BlackRock’s perspective is informed by our being a fiduciary investor. We invest on behalf of our clients and we have a fiduciary duty to them to protect and enhance the value of the assets they entrust to us. The majority of BlackRock’s clients are saving for a better financial future and, as such, we consider them long-term investors. In addition, a majority of the equity investments we make on behalf of clients are in index strategies, so they are not only long-term but locked-in investors. To protect their interests as long-term investors we must engage with companies both in direct dialogue, where appropriate, and through exercising voting rights on their behalf.
Why is a timeframe important? Most of the issues shareholders and companies cover in engagement meetings have an impact over multiple years. A company with poor corporate governance practices, including operational standards on environmental and social impacts, can outperform its peers over several quarters or even a few years. But, in time, performance will flag as poor leadership and management and underinvestment in the drivers of long-term value for the company, take their toll. Our clients will be investors through the cycle and beyond. By promoting good corporate governance practices in our engagements with companies we hope to minimise the self-inflicted bad times and thus protect our clients’ economic interests.
Importantly, good corporate governance is not compliance with a checklist of rules or guidelines. It is where high-quality boards actively support executive management to lead and run the company in a financially sound and sustainable manner. And, on the other side of the coin, it’s where shareholders hold them accountable and give them credit, for doing so.
The benefit of engagement for companies is to build a communication channel and a level of mutual understanding on governance matters with their investors. Time and again, companies find themselves in the face of a crisis in the awkward situation of introducing their board directors to long-term shareholders. As a director, wouldn’t you rather have established the relationship in advance of needing it? Isn’t it preferable to hear privately and early on about shareholder concerns so the board can take better informed decisions and respond appropriately? Or would you rather learn about those concerns once they have gained momentum across the shareholder base and the company is publicly on the defensive?
Engagement helps bring to the surface misunderstandings and issues on which management may be losing shareholder support. Being able to address the issues before they are raised in the media or votes are cast against management at the shareholder meeting is likely to be better for the company and shareholders.
We are often asked ‘who should engage?’ and there are different approaches. For our part, a governance engagement is generally led by members of the governance or stewardship team, sometimes joined by active portfolio managers. On the company side, we would expect to engage management on most operational matters, including corporate governance processes. We engage with directors where they ask to meet us, or where our concerns can’t credibly be addressed by management, perhaps where we have tried unsuccessfully to engage with management in the past or management is conflicted, say in merger transactions, or where we are concerned about management performance. Another reason we engage with directors rather than management is to hear first-hand how the board functions, how it manages its core responsibilities, such as risk oversight, succession planning – both for key executive leadership roles and for board positions – and contributing strategic and operational guidance to management.
When we engage at board level, we normally meet with the most senior independent director, so the chair, deputy chair or lead director, depending on the market, or the chair of one of the board sub-committees, depending on the focus of our engagement. Representatives of management, particularly the corporate secretary or general counsel, sometimes attend to provide support on technical details. External advisors, such as compensation consultants, might be present but won’t have a significant role in the conversation. There is usually a clear purpose and an agenda that has been agreed in advance so the right people are in the room and we have shared expectations as to desired outcomes.
“Engaging with board directors gives investors a sense of the board’s calibre, the level of engagement with management, the effectiveness of board meetings and of decision-making”
It can’t be emphasised enough that engagement is not about shareholders trying to micromanage or usurp the role of the board. It shouldn’t involve material non-public information or directors discussing matters that are rightly the domain of management. Directors also have fiduciary duties and investors expect them to fulfil them. But shareholders have a perspective that directors are unlikely to get from other quarters. In our view, the intrinsic value of shareholder-director engagement is that directors get a sense of the diversity of shareholder perspectives, as informed by their respective investment strategies and horizons, among other things. This insight can enhance directors’ contribution to board decision-making and their ability to fulfil their duties.
So how do we know there’s a link to long-term shareholder value creation? We don’t – or at least we can’t demonstrate it beyond refute. The difficulty is that good corporate governance, like corporate performance, has many facets, constructs and drivers. Engagement between shareholders and company representatives, whether management or board directors, is just one part of a sound corporate governance framework. It would be spurious to try to attribute a portion of realised long-term shareholder value to engagement.
But from a first principles perspective, where the board is the key decision-making body of the corporation, its leadership steers a company to success or failure. In our experience, companies with high-performing boards that appoint and support the work of highly skilled and engaged executive management outperform throughout a cycle. When things go wrong, as they inevitably will in our dynamic business environment, these companies recover more quickly, they adapt to the changing ecosystem and they innovate and invest for a future beyond the current leadership.
Engaging with board directors gives investors a sense of the calibre of the board, the level of engagement with management, the effectiveness of board meetings and thus of decision-making. Where shareholders are concerned that things could be better, they can use their voice to influence change to improve governance or leadership, practices and ultimately financial performance. And that is important to our clients as they will be investors in the company and dependent on its financial success today, tomorrow and well after the current board and management team have retired.
About The Author:
Michelle Edkins is a Managing Director at BlackRock and Global Head of its Investment Stewardship team of 22 specialists based in five key regions internationally. Edkin’s main responsibility is overseeing the team’s engagement on corporate governance, including environmental and social impacts, with the companies in which BlackRock invests on behalf of clients. She also serves on the firm’s Human Capital and Government Relations Steering Committees. An active participant in the public corporate governance debate, she was named in the NACD Directorship 100 Governance Professionals list for the past four years.
