2020 saw a notable change in how the world’s largest asset managers update clients on their engagement activities. These reports from BlackRock, Vanguard, and State Street Global Advisors (SSGA) are increasing in frequency and transparency, becoming more detailed about top focus areas, highlighting engagements with specific companies, and speaking more directly to boards and management.
For a year in which COVID-19, racial justice issues, and economic recession shook the business community and its stakeholders, these major institutional investors—which collectively hold 10 percent or more in most publicly traded companies in the U.S.—adhered to their original 2020 engagement priorities, while significantly increasing the volume of their engagements on climate and diversity.
Sustainability and environmental risk
All three asset managers have ranked climate change among their top priorities.
“We believe that the COVID-19 crisis accelerates the need for transformative change to address climate change as it shows the importance of being prepared and the huge cost of slow action,” wrote SSGA.
BlackRock has focused on 244 companies “with significant climate risk inherent in their business models,” with various votes against 53 of those companies during the 2020 proxy season for lack of progress on climate risk. The remaining 191 companies were placed “on watch” with an expectation for making progress over the next year.
Additionally, SSGA has integrated its proprietary R-Factor into its proxy voting and engagement guidelines, including voting against directors at companies that are laggards. The R-Factor “measures the performance of a company’s business operations and governance as it relates to financially material and industry-specific ESG risk factors as defined by the Sustainability Accounting Standards Board (SASB).”
Vanguard wrote that it “expects boards to effectively oversee climate risks and become more transparent about their decision-making process through clear and effective disclosure.”
In addition to SASB disclosures, these investors also continue to support the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). SSGA also noted the “emergence of a new trend of climate-related shareholder resolutions targeting financial institutions,” which was due in part to the publication of an updated analysis on fossil fuel financiers.
Diversity, including board composition, and human capital management
While increasing board gender diversity has been an investor priority for several years, the focus on board diversity remains top of mind and has now definitively expanded to include racial/ethnic diversity. In the second quarter, SSGA said that it voted against a director at 122 U.S. companies for lack of board diversity.
“While some companies have made progress in [the area of racial and ethnic diversity], many others have room for improvement,” wrote Vanguard. Vanguard also expects issuers to disclose aspects of board diversity, including gender, age, race, ethnicity, and national origin “at least on an aggregate basis.”
These investors are also looking beyond board diversity and becoming more likely to back shareholder proposals related to workforce diversity strategy and disclosure.
“We are observing a shift in awareness of the role companies must play in society in order to demonstrate they have earned their social license to operate,” wrote BlackRock. The asset manager increased its engagement on social issues by 173 percent since last year and discussed human capital management three times more.
BlackRock also mentioned the current consultation from SASB to develop standards regarding workforce diversity practices and disclosures in the United States.
Oversight of strategy and corporate purpose
“Board members shouldn’t rely solely on management for assessments of their companies; they should educate themselves on competitive dynamics and seek outside opinions. Ultimately, boards should work to prevent risks from becoming governance failures,” wrote Vanguard. “If a company’s practices, organizational culture, or products put employees’ or customers’ health, safety, or dignity at risk, they can pose a financial risk to investors too.”
BlackRock said that it saw a 52 percent increase in global engagements “on topics related to corporate strategy, purpose, or culture,” noting that “the onus is on companies to report on how they are adapting in response to changing economic, regulatory, and societal conditions and how the decisions they take as they adapt align to the company’s purpose and strategic framework to serve their stakeholders and deliver long-term value creation.”
SSGA highlighted that evaluating compensation amid COVID-19-related disruption “presented a unique challenge,” but observed that compensation plans are becoming increasingly complex and there has been an overreliance on relative total shareholder return.
BlackRock voted against compensation committee members at 84 U.S. companies, with such votes often accompanied by a vote against management proposals on pay policies. Both BlackRock and SSGA voted against 6 percent of U.S. compensation-related proposals, in line with their voting records for the prior year. Vanguard was also consistent year over year in its support for management’s executive compensation proposals (94 percent) and other compensation-related proposals (76 percent).
Board effectiveness and processes
BlackRock voted against management on the election of directors and related proposals 8 percent of the time—voting against or withholding votes from more directors globally this year than ever before, while it voted against one or more management proposals in 30 percent of U.S. meetings, down slightly from 34 percent in the prior year.
In the U.S., progress on board diversity was the top “board quality concern resulting in votes against directors,” according to BlackRock, followed by director independence and overcommitment of directors, both for non-CEOs and CEO-directors.
Vanguard increased its support for shareholder proposals related to board composition in the United States to 27 percent from 22 percent last year, while decreasing support for management proposals related to governance and shareholder rights to 89 percent from 94 percent.
Vanguard also said that “boards were asked how they oversee strategy and disclose risk when it comes to political contributions and policies,” a trend which is likely to continue.
(Also see BlackRock proxy voting guidelines.)
(Also see Vanguard proxy voting guidelines.)
(Also see SSGA proxy voting guidelines.)