“The board has to evolve – that’s a fact,” Ray Cameron, BlackRock Head of Investment Stewardship, told attendees of a virtual conference that examined the evolution of corporate boards. Cameron was among several speakers at last month’s ECGI/Millstein Center conference, “Board 3.0: Bringing the Private Equity Model to Public Companies,” which explored how using private equity approaches in the boardroom could help corporate boards deal with some of the new challenges companies are facing.
Cameron’s comments shed light on what institutional investors may be evaluating boards on in the months and years ahead. Though not particularly in favor of boards adopting a slew of private equity approaches—”in the private equity world, the incentive structure is incredibly different”—the one area he indicated PE thinking might be helpful was in meeting the financial needs of the company. For example, boards would be smart to learn from some of the due diligence questions private equity firms ask before proceeding with financial transactions.
To promote board evolution, Cameron recommended placing emphasis on the following areas:
• Improve board effectiveness and board quality.
Cameron emphasized that BlackRock had over 3,000 engagements with companies this year and said “[BlackRock looks] very deeply at the operation and how the board is comporting itself.” Whether the company is executing on its articulated purpose, long-term strategy and capital management strategy are all scrutinized. Additionally, the bar has been raised for boards to demonstrate that they understand how the pace of advancements in technology, the increased regulatory demands for transparency and the impact of having a global footprint have increased the board’s oversight responsibilities.
“We view the board as being a potential competitive advantage for the corporation,” Cameron said. “We look for [the board] to think about how it fulfills its fiduciary responsibilities and its oversight responsibilities … It’s important for the board to have the skills, the capabilities and the capacity to provide oversight in a very dynamic way to the management team.”
BlackRock engages with companies to understand how the board determines the skills and the experiences that are needed to guide the company to achieve its long-term strategy. Cameron said If there are gaps in board experience, BlackRock wants to know how the board is thinking about filling those gaps.
• Exercise leadership by connecting company purpose with business strategy.
Cameron said shareholders are demanding companies show how their articulated purpose drives the long-term business strategy of the organization. At BlackRock, he said, “We want to understand how the board assures itself that what’s being represented in the boardroom by the management team is in fact what is happening on a day-to-day basis within the organization, not only from a purpose perspective, but also from a culture perspective.”
This may require boards to show leadership on a much broader array of issues. Board positions on ESG concerns, such as climate change, may need to evolve at a faster pace to avoid negative votes from institutional investors.
• Hold directors more accountable.
Cameron said BlackRock would hold boards more accountable for approving strategic decisions by the management team without having the required expertise on the board to provide proper oversight. “We think that’s critically important,” he said.
He suggested that if investors, asset managers and the investment community held directors to a higher level of accountability boards would evolve a lot faster. He noted that BlackRock voted against over 5,000 directors last year, and suggested that trend would continue.
“If we more proactively exercise our responsibility as asset managers to hold those directors accountable for failing to meet their responsibility to fulfill their obligations … maybe that’s the lever that we need to really start to affect change.”