BlackRock’s Take on This Year’s Proxy Season

BlackRock’s head of corporate governance for the Americas talks compensation, emerging markets and his approach to engagement.

Rob Zivnuska is head of Americas, corporate governance and responsible investment at BlackRock.

Previously he was senior counsel in the BlackRock legal and compliance department, and also served in that capacity with Barclays Global Investors (BGI) before its merger with BlackRock.

Prior to joining BGI, he was a corporate attorney with Skadden Arps Slate Meagher & Flom. Here Zivnuska talks to deputy editor Aarti Maharaj about governance issues and this year’s proxy season.

1. Other than the new disclosure requirements regulation, what do you think is new this proxy season? What will be the major concerns for companies?

The primary concern for my team every year is the quality and independence of board members and their effective oversight of management. I believe that is a pretty mainstream perspective among large asset managers.

There are always hot topics, however, and one change we are following closely is the return of shareholder proposals requesting the right of shareholders to include a shareholder-nominated candidate on the management ballot.

The right is commonly referred to as proxy access. At least four different concepts have been proposed to companies so far, each with different standards for how long a shareholder needs to have been invested in a company, the minimum size of the investment and the number of candidates they can nominate in a given year.

As we review this marketplace of ideas, we continue to believe that any company establishing a proxy access process must have sufficient protections in place to avoid its abuse.

Corporate political spending, the shareholder’s right to act by written consent and, as always, executive compensation have also been getting a great deal of attention from companies and shareholders as we head into proxy season.

2. In terms of executive compensation, when compared to last year, what issues are expected to arise? And what do shareholders expect to see?

An unfortunate reality for shareholders is that 2011 was a much more tumultuous year in the stock market than 2010, and shareholder return will be down at many companies.

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Last year shareholders were evaluating a lot of companies where pay had risen year over year, but share prices had also increased, which may have made it more difficult to identify some poorly designed pay programs.

In a more challenging market environment, pay programs that fail to effectively align executive compensation with the experience of shareholders may be easier to identify, and a different set of companies may find themselves receiving majority ‘no’ votes on pay.

Companies that did not receive majority support on their say-on-pay vote last year have been engaging in shareholder outreach campaigns to understand the drivers behind those votes.

It has been encouraging to see boards take the vote seriously and seek to address shareholder concerns about whether pay programs effectively align compensation with performance and the competitive marketplace for executive talent.

I am also hoping to see more accessible disclosure regarding compensation programs. Some companies appear to have received a low level of support simply because they did not do a good job of explaining how their pay programs worked.

Overall, given the vote results in 2011, it seems that shareholders are in general agreement that most companies seem to manage executive compensation reasonably well. Hopefully the say-on-pay vote will become more routine and less of a distraction for many companies this year.

3. Governance in emerging markets is seen as a major concern for investors. How do you define good governance in emerging markets?

Making an assessment of good governance requires an understanding of the local market’s culture and regulatory environment.

There is not one model that works best at every company, and even in comparing developed markets such as Japan, the US and the UK, we find some significant differences between governance models. We have structured our team to ensure that we are able to review and address governance issues with an understanding of the local context.

However, in most markets we find that financial transparency and the presence of directors who are independent of management and/or any controlling shareholders are key factors in reducing the risk of the negative financial consequences that can arise in a poorly governed company.

4. How has BlackRock contributed to reshaping the governance landscape amid the recent economic turmoil?

Core to our view of governance is the belief that there are many different ways to run a company well, and we support unconventional approaches as long as they can be expected to serve the interests of long-term shareholders.

So you are not going to find us trying to aggressively reshape the governance landscape to fit a prescribed model.

BlackRock takes governance issues very seriously, and where we have governance concerns regarding a company, we find it is generally most effective to discuss our concerns with the company privately.

It is my hope that constructive dialogues with us will make companies, and particularly board members, more comfortable with the concept of engaging in discussions with shareholders, which should benefit the governance landscape as a whole.

5. What factors contribute to your idea of good governance?

Academic research has indicated that some individual factors like staggered boards or poison pills can be directly tied to share price, but good governance is not a question of ticking a few boxes.

I think of well-governed firms as having strong independent board oversight of management teams in an environment where pointed questions are welcomed and multiple viewpoints are leveraged to maximize the long-term growth of shareholder value.

Multiple viewpoints are required in order to avoid the type of groupthink that can make an organization blind to pitfalls in its strategy.

Management and board members have to be comfortable navigating pointed questions because the alternative is an organization where the pitfalls are seen, but not avoided.

A strong and independent board is required to challenge and provide counsel to management teams composed of confident, successful individuals who are used to being right and who advocate fiercely for the strategy they believe will return the best-quality long-term value to shareholders.

From my perspective, then, good governance is about identifying and managing risks and avoiding the associated diminished financial performance that comes when risks fail to pay off.

A company that lacks these components may do as well, or even better, than a company that does, but over time will be more likely to make strategic and operational missteps to the detriment of shareholders.

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