BlackRock Investment Stewardship team released its 2020 engagement priorities.
BlackRock seeks further disclosures on the director’s responsibilities, commitments, turnover, succession planning and diversity.
Blackrock stated that diverse boards make better decisions. It focuses on more than gender. It will continue to ensure that people of different genders, ethnicities, ages, industries, areas of expertise and geographic regions are represented on boards.
Australian company governance statements tend to focus only on gender. The Blackrock emphasis suggests more is required.
Governance structures that enhance accountability, limit entrenchment and align voting rights and economic interests will be encouraged.
The KPI BlackRock sets for boards was seeking to understand how effectively the board oversees management and they will hold the most senior NED accountable.
This infers that companies need to demonstrate effective board oversight in their disclosures.
Environmental Risks and Opportunities
BlackRock is asking that by the end of 2020 companies issue reports aligned with the recommendations of the Sustainability Accounting Standards Board (SASB) and Taskforce on Climate-related Financial Disclosures (TCFD).
SASB is, in effect, an American standard, adopted mostly by American companies. Nevertheless, it is the most comprehensive ESG standard, and is gaining traction given the weight of US-sourced capital invested outside of the US. Few ASX-listed companies apply it. We expect this will change over time.
Noting the growing investment risk surrounding sustainability, BlackRock will be increasingly disposed to vote against companies that have not made progress.
Corporate Strategy and Capital Allocation
BlackRock seeks to ensure that companies’ strategic frameworks are built for long-term value creation. Companies must disclose and articulate their purpose and connect it with long-term strategy. This should be reviewed on a regular basis to reflect the changing marketplace. Also the strategy must explain how a company prioritises its capital allocation.
Compensation that Promotes Long-Termism
BlackRock seeks compensation that incentivises an executive to deliver on strategic and operational objectives. It should be tied to long-term performance and not just short-term increases in share price, with measures that trigger payments explained well and justified. When pay is not aligned with company performance it must be explained thoroughly.
To ensure pay is market competitive, benchmarking with appropriately positioned peers must be undertaken. This reflects a US compliance requirement to state comparator companies used for executive benchmarking. This is not common in ASX-listed companies.
The KPI for compensation states executive pay should be aligned with both performance and shareholder investment return.
Human Capital Management
BlackRock asks companies to explain their approach to human capital management i.e. how a company establishes itself as an employer of choice. Further disclosure is sought relating to how the board oversees management’s work in these areas. BlackRock’s KPI for boards is that it manages the company’s human capital strategy.
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