Building off of CEO Larry Fink's recent 2019 proxy season in which he pledged to continue the push for “purpose and profit”, the influential institutional investor published their 2019 engagement priorities which include five primary focus areas:
- Governance: “Board composition, effectiveness, and accountability remain a top priority,” BlackRock explains in the governance section. Additionally, the institution notes that other issues – including environmental and social – require board leadership and oversight. The firm would like to see “disclosure regarding the board’s position on director responsibilities and commitments, turnover, succession planning, and diversity.” Additionally, Blackrock seeks better disclosure on board responsibilities, including involvement in crisis management (including cyber breaches, “negative media coverage”, and sudden departures of senior executives). Perhaps most significantly, BlackRock notes that if a company does not progress on board diversity, it might “hold the nominating and/or governance committee accountable for an apparent lack of commitment to board effectiveness.”
- Corporate Strategy: Similar to the CEO letter, BlackRock urges companies to connect the company’s purpose (i.e., “what it does every day to create value for its stakeholders) to its long-term strategy.
- Compensation: On compensation, BlackRock has identified a specific interest in “how boards establish and explain performance metrics and hurdles in the context of the aforementioned long-term strategy setting” with performance measures that are “closely linked to the company’s long-term strategy and goals”. To keep a focus on long-term success, BlackRock is asking the company to articulate a balance between “input” metrics in management’s control relative to “output” metrics such as EPS or TSR. Notably, BlackRock “may ask the board to explain the extent to which it considers internal pay equity and the broader macroeconomic context when setting pay."
- Environmental Risks: BlackRock focuses on environmental factors which relate to the business model, noting that “sound practices in relation to the environmental factors inherent to the business model can be a signal of operational excellence and management quality.” Citing the difficulty of reporting standards in this area, Blackrock notes that they support the Sustainability Accounting Standards Board's (SASB) industry-specific guidance in the context of its environmental pillar (as identified in its materiality map) beneficial.”
- Human Capital Management: Citing a pronounced view that companies state their success is heavily dependent on talent, BlackRock notes the importance of human capital metrics, stating “[i]t is therefore important to investors that companies establish themselves as the employer of choice for the workers on whom they depend.” BlackRock clearly views human capital management as a factor in establishing a competitive advantage for firms. The letter notes that “reporting is still evolving” but BlackRock believes it “in the benefit of companies” to move towards a “more robust reporting disclosure of human metrics.” BlackRock once again cites SASB as having a “useful” example.