At BlackRock, Vanguard and State Street, 'Engagement' Has Different Meanings
January 20 2018 - 7:29AM
Dow Jones News
By Sarah Krouse
The biggest passive money managers all like to use some version
of the word "engage" when describing how they hold their portfolio
companies accountable behind the scenes. They differ on how that
engagement is measured.
BlackRock Chief Executive Laurence Fink cited the strategy this
week in his annual letter to other CEOs. He used the words "engage"
or "engagement" 15 times to describe how BlackRock would be more
assertive with the companies in which it invests while ensuring
they make the right decisions over time for long-term
shareholders.
BlackRock had 1,603 "engagements" with companies in which it
invests during 2017. That is more than the 954 engagements counted
by rival Vanguard Group and 676 from State Street Corp.'s money
management unit last year.
How those engagements are defined and disclosed varies from firm
to firm, making it difficult to assess how aggressively these big
U.S. shareholders are wielding their growing clout.
BlackRock's engagements, according to the company, can be
"basic," "moderate" or "extensive." Basic can be one conversation
on a "routine matter"; moderate "generally involves more than one
meeting," while extensive can be "numerous meetings over a longer
time frame."
For Vanguard and State Street each phone call or meeting counts
as an "engagement". State Street typically also sends hundreds of
letters to its portfolio companies that it also classifies as
"engagements," though they aren't included in the firm's count of
676 engagements.
The three managers collectively oversee more than $13 trillion
in assets, bigger than the size of China's economy, the world's
second-largest. They have ramped up efforts to interact with their
portfolio companies as their assets and stakes in major companies
have swelled. Those three firms owned 18.5% of the S&P 500 at
the end of the third quarter, up from 14.7% five years earlier,
according to research by Lazard Ltd.
BlackRock, Vanguard and State Street say they prefer not to use
their heft to make immediate demands such as putting a specific
individual on the board or divesting business units, in contrast to
more aggressive dictates from activist investors.
Instead they say they like to work behind the scenes and talk
with their portfolio companies routinely about their policies and
plans.
BlackRock, for example, plans to write to about 300 companies in
the Russell 1000 that have fewer than two women on the board to ask
them to disclose their approach to boardroom and employee
diversity, BlackRock governance head Michelle Edkins said Thursday
at a Santa Clara University event in California. The firm plans to
ask them to set a time frame in which they will improve their
diversity. State Street also pressed its portfolio companies to
improve their boardroom diversity in 2017.
"It is a conversation and we have an agenda and we have several
things we want to discuss," Ms. Edkins said of the firm's meetings
with companies. "It is absolutely not a thing that we do over
bottles of wine. If they're lucky, they get a really nasty cup of
BlackRock coffee."
BlackRock has more staff dedicated to these discussions and
other investment stewardship tasks than Vanguard or State Street.
It plans to double that group to 60 in the next three years.
"The growth of indexing demands that we now take this function
to a new level," Mr. Fink said of shareholder engagement in his
annual letter earlier this week.
Unlike traditional stock pickers, index funds managers can't
sell a stock if they are disappointed by a company's performance or
disagree with its strategy. They do, however, have other ways they
can express their opinions beyond engagement.
All use shareholder votes to oppose or support the appointment
of board members or management resolutions as well as proposals
from fellow shareholders. What they decide is increasingly
determining the outcome of these shareholder votes. The support of
BlackRock and Vanguard, for example, helped a shareholder proposal
pass in 2017 at Exxon Mobil Corp.'s annual meeting that called for
the company to share more information about how climate change and
regulations could affect its operations.
At times, the three big passive owners come to differing
conclusions. Vanguard, Procter & Gamble Co.'s biggest
shareholder, sided with management in the company's battle last
year with Nelson Peltz, the Journal reported, while BlackRock and
State Street voted with Mr. Peltz's Trian Fund Management. Mr.
Peltz narrowly won a seat on the board.
Write to Sarah Krouse at sarah.krouse@wsj.com
(END) Dow Jones Newswires
January 20, 2018 07:14 ET (12:14 GMT)
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