BlackRock Inc., the world’s biggest money manager, is looking to leverage its $3.5 trillion of client assets by embarking on an unprecedented campaign urging corporations to adopt shareholder-friendly practices.
Laurence D. Fink, BlackRock’s chief executive officer, said in a letter yesterday to 600 of its biggest holdings, including Apple Inc., Coca-Cola Co., BNP Paribas SA and Deutsche Telekom AG, that his firm “seeks to engage in dialogue” with management to address issues that will be raised this year at shareholder meetings.
“We think it is particularly important to have such discussions - with us and other investors - well in advance of the voting deadlines for your shareholder meeting and prior to any engagement you may undertake with proxy-advisory firms,” Fink wrote in the letter, referring to companies that help institutional investors decide how to vote.
BlackRock, which is based in New York, holds at least 5 percent of the shares of 2,400 companies worldwide. The firm’s public stance under Fink, who co-founded BlackRock more than two decades ago, is unusual in the U.S., where traditional asset managers haven’t typically been vocal about corporate practices at companies whose shares they hold. Fink said last year he believes money managers will play a larger role in financial markets as Wall Street’s influence declines.
‘Obligation to Lead’
“Fink has achieved so much and acquired such a high profile that he believes there is an obligation to lead institutional asset managers, and corporate governance is a hot topic to focus on,” Burton Greenwald, a mutual-fund consultant in Philadelphia, said in a telephone interview. “He may also see this as an opportunity to enhance the reputation of BlackRock and the overall image of Wall Street-type firms at a time when Wall Street is under withering fire from all quarters.”
While some pension funds, union plans and activist investors such as Carl Icahn and Nelson Peltz have a reputation for expressing their views on governance-related topics ranging from climate change to company strategy, managers of mutual funds typically avoid such strategies.
A May 2011 study by the American Federation of State, County and Municipal Employees, a public workers’ union, and Fund Votes, an independent research website, showed that mutual funds supported 80 percent of management proposals in 2010, compared with 84 percent during the prior year. In a presentation on its website, BlackRock said it has voted in favor of 91 percent of proposals recommended by management.
BlackRock became the world’s biggest asset manager after completing its acquisition in December 2009 of Barclays Global Investors, which added index products such as exchange-traded funds to the firm’s active stock and bond holdings.
Since then, BlackRock has put together a 20-member team for corporate governance and responsible investment with the primary goal of protecting investment assets and increasing client returns over time, Michelle Edkins, who heads the group, said in an interview.
“Good quality leadership by boards and good quality execution by management leads to better performance by companies over time,” said Edkins, a former executive at Hermes Fund Managers Ltd., a London-based investment firm. “As a major shareholder on behalf of our clients, we want to make sure that we protect the value of client assets.”
BlackRock’s corporate governance team works with the firm’s portfolio managers to learn more about the companies. In the year ended June 30, BlackRock voted on 129,017 proposals at at 15,165 shareholder meetings worldwide, the firm said.
In yesterday’s letter, Fink wrote that BlackRock reaches its voting decisions independently of proxy-advisory firms and that they are designed to “protect the economic interests” of its investors.
Big shareholders can cause companies to change certain practices even before a proposal comes up for a vote. Last year, General Electric amended terms of the 2 million options awarded to CEO Jeffrey Immelt by linking them to cash flow and stock performance, the company said at the time. The move came after conversations with top shareholders, including BlackRock, before the shareholder meeting.
BlackRock also undertakes what it describes as “event-driven” engagements with companies when something happens that could harm shareholders in a specific industry group, Edkins said. The firm started discussions with energy companies after a well operated by BP Plc spewed oil into the Gulf of Mexico in April 2010. BlackRock was London-based BP’s largest shareholder as of the end of that year, according to data compiled by Bloomberg.
Edkins says BlackRock isn’t interested in managing or interfering in the day-to-day operations of companies it holds. BlackRock will seek conversations on broader topics, including independent boards at companies, executive pay and succession planning, she said.
“Lots of firms now outsource their proxy voting,” Mercer Bullard, president and founder of Fund Democracy, an Oxford, Mississippi-based mutual-fund shareholder advocacy group, said in an interview. “That they have people working full time on this suggests BlackRock believes that there are investment returns to be had by being smart about using their shareholder power.”
Geoff Bobroff, an independent fund analyst, said that BlackRock’s large passive business puts it at a disadvantage to firms that employ active stock-picking because index funds cannot sell the shares if they are dissatisfied with the management. Bobroff also said companies may not be receptive to BlackRock’s ideas.
“They are the largest asset manager in the world and from that standpoint some companies might take affront,” said Bobroff, who is based in East Greenwich, Rhode Island. “In one regard it’s the 800-pound gorilla flexing its muscles.”
Edkins said being a passive holder actually helps build a relationship with companies, because the firms know that the money manager will maintain its stake.
“Having a foundation of a passive holdings strengthen the conversation because the companies realize this is a long-term relationship,” Edkins said. “It doesn’t make us any more influential.”
BlackRock’s Fink, who co-founded the firm in a one-room office in Manhattan in 1988, said during an alumni event hosted by UCLA Anderson School of Management in November that as the power of traditional Wall Street firms wanes, money managers have a greater role in shaping financial markets.
“I believe we’re going to go into the decade where the money holders are going to have a significant responsibility, more than we’ve ever had in our lifetimes,” Fink said at the time. “So think of what that means for proxies and our responsibility in voting and things like that.”