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BlackRock: A new model for shareholder engagement


The world’s largest asset manager, BlackRock, will be closely monitoring the impact listed companies have on society and plans to deepen its engagement with companies by doubling the size of its investment stewardship team over the next three years.

‘To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,’ BlackRock chairman and CEO Larry Fink notes in his annual letter to CEOs.

‘Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate,’ he adds.

Fink explains that with the US$1.7 trillion in the active funds BlackRock manages, it can choose to sell a company’s shares if it has doubts about its strategic direction or long-term growth. But it can’t do that with companies in its index funds.

As a result, he says BlackRock’s responsibility to engage and vote is more important than ever, noting that the time has come for a new model for shareholder engagement.

‘Shareholder engagement has been too focused on annual meetings and proxy votes. If engagement is to be meaningful and productive — if we collectively are going to focus on benefitting shareholders instead of wasting time and money in proxy fights — then engagement needs to be a year-round conversation about improving long-term value.’

Fink reveals that since 2011, BlackRock had been transforming its practice from one predominantly focused on proxy voting towards one based on engagement.

As part of its new framework for deeper conversations with listed companies, BlackRock will closely focus on how companies describe their strategy for long-term growth and whether this has been reviewed by their boards. When it meets with directors, it will expect them to describe the board process for overseeing strategy.

Fink says: ‘The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges and the context of its shorter-term decisions.

‘Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends — from slow wage growth to rising automation to climate change — affect your potential for growth.’

Fink notes that stakeholders are increasingly demanding that companies exercise leadership on a broader range of issues.

‘They are right to. A company’s ability to manage environmental, social and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.’

Fink says questions companies should ask themselves include:

  • What role do we play in the community?
  • How are we managing our impact on the environment?
  • Are we working to create a diverse workforce?
  • Are we adapting to technological change?
  • Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?
  • Are we using behavioural finance and other tools to prepare workers for retirement, so that they invest in a way that that will help them achieve their goals?

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