BlackRock Voting Against Directors Could Move Boards To Rethink Governance, Strategy

Living up to expectations may require some boards to take a hard and honest look at how they’ve approached dealing with some of the five priorities the investor has highlighted.

BlackRock is taking a more aggressive approach to indicating its displeasure with boards that display lax governance. True to its word, the world’s largest money manager held corporate boards more accountable by voting against 10 percent of directors this year, up from 8.5 percent last year. This shift by the influential institutional investor could be the first indication that shareholders are becoming more willing to hold directors accountable for their decisions on critical governance issues.

In BlackRock’s Investment Stewardship Report the money manager revealed the reasons it voted against directors the most: lack of independence, lack of diversity, executive compensation and overboarding. These are issues that shareholders have questioned boards about for years. This proxy season, BlackRock sent a stronger message to directors about governance changes shareholders have been asking for. On more than 64,000 votes during director elections, BlackRock voted against directors 6,560 times.

BlackRock also voted against management on 35 percent of resolutions filed by shareholders, which is a subtle swipe at board decision making. The institutional investor voted against management on nearly two-thirds of all climate proposals filed this year, indicating a huge gap in how investors and companies view the potential impact climate change may have on long term growth. As the world’s largest institutional investor shows greater wiliness to vote against the wishes of corporate boards, it could lead to other investors following suit. If that happens, many directors could lose their seats.

The good news is that BlackRock is clear about what it will be talking to boards about and evaluating boards on as it casts votes “for” or “against” in the future: “We complement our analysis of a company’s approach to its material risks and opportunities with engagement across five priorities: board quality and effectiveness; incentives aligned with value creation, climate and natural capital; strategy, purpose, and financial resilience; and company impacts on people,” the Stewardship Report states.

The report also states, “We ask that companies provide comprehensive disclosures on their long-term strategy, the milestones to delivering it, and the governance and operational processes that underpin their businesses. In addition to robust financial disclosures, we ask that companies provide the data and narrative that help investors understand how they approach material, business relevant sustainability risks and opportunities.”

While hearing this from BlackRock likely isn’t new, what is new is what BlackRock appears to be willing to do if these requests are ignored or followed half-heartedly. Living up to BlackRock’s expectations may require some boards to take a hard and honest look at how they’ve approached dealing with some of the five priorities BlackRock has highlighted. If boards are truly interested in improving themselves, it is not a bad exercise to undertake.

For example, companies that have laid off workers because demand waned during the pandemic, may now need to explain why they haven’t been able to rehire workers fast enough to meet demand that is surging back. It could be argued that there is something wrong with a corporate strategy that couldn’t better anticipate when the market would return back to normal.

Additionally, companies that haven’t concerned themselves with how the “company impacts people” may want to develop a business strategy related to how the company treats people since BlackRock will be evaluating boards on this issue. Social issues carry greater risk for companies today than they have in the past, and boards must adjust their thinking to use this changing dynamic to the company’s advantage whenever possible. If they don’t know already, boards need to realize that companies that are seen as bad actors generally make less money.

In its Stewardship Report, BlackRock is very clear: “We believe that when a company is not effectively addressing a risk that could impact long-term value, its directors should be held accountable.” Now we will find out what becomes of that threat.