May 25, 2017
Next week Blackrock shareholders will vote on an important proposal that has potential to make a real difference on CEO pay. It isn’t just an advisory vote on the company’s pay, but one that seeks to learn more about why Blackrock routinely supports outrageous pay packages at the companies in its portfolios. Specifically, the proposal requests that the Board of Directors issue a report to shareholders which evaluates options for BlackRock to bring its voting practices in line with its stated principle of linking executive compensation and performance. Such report should assess whether and how the proposed changes would advance the interests of its clients and shareholders.
The Steve Silberstein Trust first filed this proposal last year, and it received press attention from the New York Times which included the memorable headline, “Blackrock wields its big stick like a wet noodle on CEO pay.” Enough shareholders supported that proposal that the threshold for resubmission was crossed. This year, ISS’s SRI policy service is recommending support for the proposal, noting that the “requested report would benefit shareholders.”
As You Sow has been monitoring votes on pay for several years. Nearly every one of the 118 mutual fund families and over pension funds opposed more pay packages in 2016 than they had in 2015. Yet the overall vote levels pay packages received did not change substantially. How is that possible? Primailary because three of the largest funds (Blackrock, Vanguard and TIAA are also the least likely to oppose proposals).
In the most recent version of our annual report on the 100 Most Overpaid CEOs in the S&P 500, Blackrock voted against pay packages at only 7% of the companies. Contrast that with the pension funds:
- Florida State Board of Administration voted against 82%
- State of Wisconsin Investment Board voted against 73%
- Colorado Public Employees Retirement voted against 46%
In fact none of the pension funds voted against as few of the packages as Blackrock did. The pension funds who voted against the fewest packages still opposed more than three times the number that Blackrock did, and more than one fund voted against more than 10 times as many packages as Blackrock did.
Likewise, almost all large mutual funds opposed more pay packages than Blackrock did. Dimensional voted against 53.2%, Columbia against 45% and so on.
Why is its voting record so pallid? Blackrock is hardly impartial on a compensation system in which it is so deeply implicated itself. The company itself has a CEO we view to be overpaid. In fact, at least one proxy advisory firm has recommended against pay at the company this year.
Blackrock is a behemoth with a mission statement is, “We are one Blackrock.” Their website says, “Constant communication is critical to our success.” Yet as we have followed the company we often have the feeling that the right hand doesn’t know what the left hand is doing however, or that the spokespeople know how the proxies are being voted. For example, last year Amra Balic , the company’s head of investment stewardship in Europe, reportedly sent a strongly worded letter to U.K. companies. In the letter, Balic said Blackrock “would only approve salary rises for top executives if firms increase workers’ wages by a similar amount.” This would be a game changer if enacted, but it counters voting at U.S. companies.
Here’s an example, unrelated to compensation, of an astonishing internal disconnect. This year shareholders vote not only on pay packages but on how often they will vote on pay packages, a vote sometimes called, “Say when on pay.”
Here’s how the Board at Blackrock recommends shareholders should vote on the company’s own proxy:
After careful consideration, the Board has determined that future advisory votes on executive compensation that occur every year is most appropriate for our Company, and the Board recommends that you vote for a one-year interval for future advisory votes on executive compensation.
The Board believes that an annual advisory vote on executive compensation will allow our shareholders to provide us with their input on our compensation philosophy, policies and practices as disclosed in the Proxy Statement on a timely basis. Additionally, an annual advisory vote on executive compensation is consistent with our policy of seeking input from, and engaging in discussions with, our shareholders on corporate governance matters and our executive compensation philosophy, policies and practices. We understand that our shareholders may have different views as to what is the best approach for the Company, and we look forward to hearing from our shareholders on this proposal.
Here’s what Blackrock says in its guidelines about how it vote at other companies
Advisory votes on the frequency of Say on Pay resolutions (“Say When on Pay”) BlackRock will generally opt for a triennial vote on Say on Pay. We believe that shareholders should undertake an annual review of executive compensation and express their concerns through their vote on the members of the compensation committee. As a result, it is generally not necessary to hold a Say on Pay vote on an annual basis, as the Say on Pay vote merely supplements the shareholder’s vote on compensation committee members. However, we may support annual Say on Pay votes in some situations, for example, where we conclude that a company has failed to align pay with performance.
So Blackrock as a shareholder believes that every three years is the right amount of review (something I disagree with), but as a company recommends its shareholders vote for annual votes. The company is unable to be consistent even on a simple matter of one year vs. three year votes. How then does it enact consistent analysis on compensation, an issue far more nuanced and complicated. Shareholders are given very little information.
The amount of support proposal at Blackrock can gain is limited by the company’s structure. PNC which controls 21.2% of shares has a signed agreement that guarantees it will not vote in favor of shareholder proposals. Specifically, “PNC has agreed to vote all of its voting shares in accordance with the recommendation of the Board of Directors on all matters.” Note that I recently reviewed pay at companies insulated by shareholder
However, if more shareholders speak out and support the proposal, perhaps Blackrock will manage to put some starch into that wet noodle.