Proxy published: April 17, 2015
Meeting date: May 28, 2015
Blackrock was the only company that appeared in two sections of our report identifying overpaid CEOs and how mutual funds voted on them. First, Blackrock CEO Larry Fink, with pay of over $22.9 million last year, he ranked as the 26th most overpaid CEO in the country (compared to his performance a regression analysis shows he is overpaid by at least $11 million a year.) Second, Blackrock as a fund manager votes on the pay of all the other CEOs of all the other companies that it invests in.
Blackrock controls the votes of over five percent of the shares in every company in America, probably more votes than any other fund manager in the world.
As the world’s largest asset manager Blackrock held 96 of the companies we identified, and approved compensation at nearly all of them.
As the CEO of Blackrock, Larry Fink received total disclosed compensation of $23,862,458.
Blackrock came out with new voting guidelines in February 2015 on how it votes on compensation and other issues at other companies which included a special appendix on “Our approach to say on pay.” The term excessive is mentioned only in the context of “relative to peers.”
Thus it is worth looking further at discussion of peers in Blackrock’s proxy statement. Interestingly, the proxy states that Semler Bossy, the independent consultant hired by the compensation committee provided compensation data on publicly traded asset management companies, which were listed in the proxy. However, “Given the diversity and scale of our global platform, we do not believe that [these] companies represent a comparable peer group.” Instead of relying on the independent consultant data the company looked at data from management-hired McLagan Partners. According to the proxy statement, McLagan’s data “which include publicly traded companies as well as private companies, offers more suitable comparisons through which BlackRock can understand the competitiveness of its executive compensation programs overall, by functional business and by title/individual.”
That being said, the guidelines as a whole outlines some important principles, for example, “We are concerned about the potential ratchet effect of explicit benchmarking to peers. We therefore believe that companies should use peer groups to maintain an awareness of peer pay levels and practices so that pay is market competitive, while mitigating potential ratcheting of pay that is disconnected from actual performance.”
The company’s votes do not display the values they espouse. They have a disclosed preference for preferring discussions with issuers to voting against plans on the proxy.
We have no way of knowing how powerful these discussions may or may not be. We can tell there is a deleterious effect in not voting against packages: the high votes are used broadly by compensation consultants as a justification for the status quo. In fact at a meeting of the Council of Institutional Investors, consultant Ira Kay told an audience that high average votes reflect an “endorsement of the model” of current executive compensation. The fact that two of the largest equity holders, Blackrock and TIAA-CREF, rely on polite exchanges behind closed doors rather than voting distorts investors’ true opinions of compensation.
Finally, Larry Fink is a thoughtful man who has taken some positive and powerful steps, on the side of the long term investor. His annual letters to CEO’s of S&P 500 companies concisely challenge companies to invest in building sustainable business models and not over-using company cash on dividends and buybacks. It seems to me that Fink may have a blind spot when he lectures on activist investors but fails to consider how executive self-interest plays into these same issues. Many executives now hold a significant portion of their personal wealth in equity, and dividends and buybacks (in the absence of rigorous retention requirements), are very much in their personal self-interest. One intriguing chart, for example, shows that in 2013 and 2014 insider’s year-high selling closely aligned to company’s year-high buying.
We hope as Fink considers his letter for next year, and as the company votes their proxies this year, they will consider all of these points.