Larry Fink's Letter to CEOs
On January 26th, Larry Fink, the CEO of BlackRock, published his 2021 Letter to CEOs.
Consistent with BlackRock's recent policy updates discussed below, Fink's letter builds on themes of prior years:
- Explicitly framing ESG matters as material business issues
- Evolving BlackRock's approach to climate risk
- Re-emphasizing its call for TCFD-aligned disclosure
- Highlighting corporate purpose, and
- Urging disclosures on diversity, equity and inclusion
This year, Fink's letter opens with a somber examination of the far-reaching and systemic impacts of the pandemic on the global economy. He states, "I believe that the pandemic has presented such an existential crisis – such a stark reminder of our fragility – that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives. It has reminded us how the biggest crises, whether medical or environmental, demand a global and ambitious response."
Fink's 2021 letter also calls on companies to:
- Disclose how their business plans will be compatible with a net zero economy; further information on BlackRock's commitment to a net-zero economy is detailed in Larry Fink's companion letter to clients, also published on January 26th
- Adopt a single ESG reporting disclosure standard, such as the Task Force on Climate-Related Financial Disclosure ("TCFD") in the case of climate-related disclosure
- Focus on long-term plans to improve diversity, equity and inclusion in talent strategies; BlackRock itself has published its EEO-1 Survey workforce diversity data and has pledged to bolster the number of BlackRock employees by 30% by 2024
A link to the full letter can be found here.
BlackRock Updated Voting Guidelines
In December, BlackRock released its 2021 U.S. proxy voting guidelines, along with updated global principles that outline its 2021 stewardship expectations. Key changes to its U.S. proxy voting guidelines are discussed herein.
Consistent with Larry Fink's declarations in his 2020 and 2021 letters to CEOs focusing on climate risk as investment risk, BlackRock's 2021 updated guidelines and expectations articulate BlackRock's heightened expectations regarding disclosure and management of climate risk, as well as other sustainability topics such as human capital management, including in particular diversity, equity and inclusion and attention to stakeholder interests. In the introduction of the updated guidelines BlackRock has added explicit language indicating that it considers environmental, social and governance ("ESG") matters to be material business issues. Also, BlackRock has updated its explanation of the guidelines to indicate they set forth BlackRock's views on ESG factors, where previously the guidelines referred to "corporate governance" issues. The timing of these updates itself is also notable (in prior years policy updates have been released closer to the commencement of proxy season) and consistent with BlackRock's efforts over the last several months to enhance the transparency with which it conducts its stewardship activities.
BlackRock's updates clarify its expectations with respect to management of climate risk. BlackRock now expects all companies to "articulate how they are aligned to a scenario in which global warming is limited to well below 2° C and is consistent with a global aspiration to reach net zero GHG emissions by 2050." It also expects companies to disclose challenges and opportunities for innovation posed by the transition to a low-carbon future. Lastly, the revised BlackRock's guidelines now explicitly state that BlackRock may support/vote in favor of shareholder proposals that seek disclosure of climate plans aligned with its climate-related disclosure expectations. Indeed, in its global voting principles, BlackRock reports that from July 1 to December 4, 2020, it supported 8 of the 9 (89%) shareholder proposals addressing environmental topics. Its global principles also set forth additional details regarding its climate-related engagement plans for 2021, which includes an expanded focus on more than 1,000 companies. According to BlackRock, these companies account for more than 90% of global scope 1 and 2 emissions (an increase from the 440 carbon-intensive companies included in its 2020 focus universe).
ESG Disclosure Expectations
Last year, BlackRock's guidelines articulated its expectations that companies produce disclosure aligned with the recommendations of the TCFD and the standards developed by the Sustainability Accounting Standards Board (SASB). This year's letter updates more directly BlackRock's plans to advocate for continued improvement in companies' reporting of material ESG risks and opportunities, and to hold management and directors accountable where it determines such disclosures are insufficient. Consistent with its shift away from an engagement-led approach with respect to voting decision-making, it has also removed prior language relating to assessing the results of its engagement with a company on a particular issue before determining whether the management of such issue necessitates voting action.
Its guidelines also now reflect the belief that the structure of the TCFD's framework – governance, strategy, risk management and metrics and targets – is a useful way to approach a range of sustainability-related risks and opportunities beyond climate change. Accordingly, BlackRock is now asking companies to use this framework to disclose how they identify, assess, manage and oversee sustainability-related risks that are financially material and decision-useful within their industry. With respect to SASB-aligned reporting, BlackRock's guidelines have been revised to remove language that provided that companies could "disclose a similar set of data" relevant to their business as an alternative to applicable SASB standard. BlackRock now clearly articulates an expectation that companies publish SASB-aligned reporting that includes "industry-specific, material metrics and rigorous targets."
Board Responsiveness to Shareholder Proposal and Director Election Voting Outcomes
On the topic of shareholder responsiveness, the guidelines have been revised to heighten BlackRock's expectations with respect to boards' responsibilities related to voting outcomes. With respect to shareholder proposals, BlackRock has expanded circumstances in which it will take voting action against the independent chair or lead independent director and/or members of the nominating/governance committee. Specifically, such action will no longer require failure by the board to implement a majority supported shareholder proposal. Now, failure to consider a shareholder proposal addressing a material topic (in BlackRock's opinion) that received substantial support would be a basis upon which to vote against the responsible directors(s). Based on BlackRock's analysis of E&S shareholder proposals contained in its global guidelines, it appears that it views significant support to be proposals that receive support of 30% or more.
As for its approach to support of shareholder proposals going forward, in light of the need for "urgent action on many business relevant sustainability issues," BlackRock will now support shareholder proposals where it agrees with a proposal's intent to address a material business risk and determines that management could improve in managing and disclosing that risk. In a shift away from its historic engagement-led approach, its revised guidelines indicate an increased likelihood of supporting proposals without waiting to assess the effectiveness of engagement.
The guidelines as revised also lower the threshold of director opposition pursuant to which BlackRock would take voting action against the nominating committee chair for failure to adequately respond to shareholder concerns from an against vote of 30% cast to 25% outstanding.
Other Board Matters
BlackRock has added new introductory text to the Board of Directors section of its guidelines to indicate that it views director elections as one of its most critical responsibilities. In assessing board effectiveness, it now indicates that, "Disclosure of material issues that affect the company's long-term strategy and value creation, including material ESG factors, is essential for shareholders to be able to appropriately understand and assess how effectively the board is identifying, managing, and mitigating risks." It goes on to provide that, where a board has not adequately addressed or disclosed one or more material issues, it may vote against the directors it views as accountable for the failure, or take other appropriate voting action. Similar language has also been added to the Oversight section of the guidelines, indicating that failure to adequately oversee or disclose material ESG risk factors is now a basis pursuant to which it will consider voting against relevant committee members or individual directors. Also, the Risk Oversight section now specifies that companies should have a process for identifying, monitoring and managing "business and material ESG risks" rather than simply "key risks." Consistent with these updates, in its global principles, BlackRock reports having voted against over 1,200 directors on a range of ESG-related issues from July 1 to December 4, 2020.
In assessing board composition, BlackRock has revised its guidelines to more explicitly note its expectations regarding racial diversity, and to change its approach to assessing board tenure. Specifically, race has been added as an element of diversity that boards should consider in identifying candidates, and the guidelines now encourage disclosure on demographics related to board diversity, as well as "measurable milestones to achieve a boardroom reflective of multi-faceted racial, ethnic, and gender representation." Regarding tenure, previously BlackRock's guidelines indicated that it was not opposed to long-tenured directors in principle and that long tenure is not an impediment to independence. That language has been deleted, and new language added providing that BlackRock will consider average board tenure to evaluate processes for board renewal, and that it may vote in opposition to boards that appear to have an insufficient mix of short-, medium, and long-tenured directors.
With respect to classified board structures, the guidelines have been revised to specifically add closed-end funds and business development companies, or BDCs, as non-operating companies that, in exception to BlackRock's general expectation that directors be elected annually, may warrant maintaining a classified board structure.
In the case of contested director elections, BlackRock has added the ownership position and holding period of the dissident as factors to be considered in its analysis.
With respect to overboarding, BlackRock has refined its policy, which previously provided that public company CEOs serving on more than two public boards would be considered overboarded, to extend to all executive directors or fund managers serving on a board in addition to CEOs.
Capital Structure Proposals
In assessing proposals to increase the number of authorized common shares, BlackRock has removed language indicating that it is generally predisposed to support such proposals if the board believes the shares to be necessary to carry out the company's business. As revised, such proposals will be considered on a case-by-case basis.
BlackRock's guidelines now express a preference for annual frequency with respect to say on pay votes, a shift from its historic approach to defer to the board's judgment on appropriate frequency. BlackRock has also added new introductory language setting forth expectations that compensation structures appropriately incentivize executives and align pay with long-term performance, and that it will hold compensation committee members accountable for poor structures or practices. These expectations include that companies adopt rigorous performance metrics tied to strategy, clearly link variable pay to company performance that drives value creation and use vesting timeframes that focus on long-term value creation. As revised, the guidelines indicate that BlackRock is generally not supportive of one-off or special bonuses not tied to performance. Where a compensation committee uses discretion, it expects disclosure explaining how and why the discretion was used and how the adjusted outcome is aligned with shareholders' interest. As for contractual arrangements, BlackRock expects compensation committees to avoid arrangements that provide executives with material compensation in the event of early contract termination. Lastly, the guidelines provide that pension contributions and other deferred compensation should be "reasonable in light of market practice."
With respect to golden parachutes, while the factors BlackRock considers in evaluating such arrangements has not changed, its prior position to normally support advisory votes on golden parachutes (unless excessive or detrimental to shareholders) has been removed, suggesting it may increasingly vote against such proposals.
Virtual Shareholder Meetings
A new section on virtual shareholder meetings provides that BlackRock views virtual meetings as a viable method for conducting annual and special meetings. However, BlackRock expects such meetings to provide a "meaningful opportunity [for shareholders] to participate in the meeting and interact with the board and management." Accordingly, the format used should facilitate open dialogue and allow shareholders to "voice concerns and provide feedback without undue censorship."
"S" Focused Revisions
In a new section for 2021, BlackRock outlines its views regarding human capital management (HCM), which has been a focus area of BlackRock for some time. This section outlines BlackRock's expectation that boards oversee HCM, and that companies disclose workforce demographics, including gender, race and ethnicity, in line with the EEO-1 Survey, as well as provide qualitative data regarding the steps a company is taking to advance diversity, equity and inclusion. Where a company's disclosures or practices are inadequate as compared to the market or peers, or if it cannot determine a company's effectiveness in overseeing HCM risks and opportunities, it may vote against appropriate committee members or support relevant shareholder proposals.
Another new section for 2021 articulates its expectations with respect to a company's "Key Stakeholder Interests," such as employees, suppliers, customers, regulators and the communities in which a company operates. While no specific voting action is tied to stakeholder interests, BlackRock expects companies to oversee and mitigate risks that may expose a company to legal, regulatory, operational or reputational risks, and "jeopardize their social license to operate" through appropriate diligence processes and effective board oversight.
On the subject of political activities, BlackRock has revised it guidelines to indicate that it will evaluate shareholder proposals seeking disclosure on such activities to consider how a company's lobbying activities may impact the company, as well as whether "there is alignment between a company's stated positions on policy matters material to its strategy and positions taken by industry groups of which it is a member." Where it identifies misalignment, it may support shareholder proposals seeking disclosure.
Mergers and Acquisitions
As revised, BlackRock has provided additional guidance regarding factors it will consider in assessing mergers, acquisitions, asset sales and other special transactions, including the explanation for the economic and strategic rationale of the transaction and the degree to which the transaction enhances long-term shareholder value.
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