27 June 2014 Catherine Woods Financial Reporting Council Fifth Floor Aldwych House 71-91 Aldwych London WC2B 4HN Submitted via email to: codereview@frc.org.uk RE: FRC Proposed revisions to the UK Corporate Governance Code Dear Catherine, BlackRock is pleased to have the opportunity to respond to the Financial Reporting Council s (FRC) consultation on directors remuneration. BlackRock is one of the world s pre-eminent investment management firms and a premier provider of global investment management, risk management and advisory services to institutional and retail clients around the world. As of 31 March 2014, BlackRock managed assets on behalf of its clients of 2.64 trillion across equity, fixed income, cash management, alternative investment and multi-investment and advisory strategies including the ishares exchange traded funds. Through BlackRock Solutions, the firm also offers risk management, strategic advisory and enterprise investment system services to a broad base of clients, including governments and multi-lateral agencies. BlackRock has a pan-european client base serviced from 22 offices across the continent. Public sector and multi-employer pension plans, insurance companies, third-party distributors and mutual funds, endowments, foundations, charities, corporations, official institutions, banks and individuals invest with BlackRock. We welcome the opportunity to address, and comment on, the issues raised by this consultation and we will continue to work with the FRC on any specific issues that may assist in improving the UK Corporate Governance Code. 1
Key points Directors remuneration BlackRock is broadly supportive of the changes proposed to the UK Governance Code. We believe that executive remuneration packages should facilitate the execution of strategy, and support the achievement of sustainable returns over the longer term. A significant proportion of executive remuneration should be performance-related to demonstrate the link to the execution of strategy. Rewards earned should be proportionate to the level of success in executing upon strategy. Further, we believe that companies should be afforded the flexibility to adopt the remuneration package most suitable to facilitate the execution of their strategy and that the responsibility of putting an appropriate structure in place lies with the companies Boards of Directors. This includes any provisions to allow for the recovery or withholding of sums. BlackRock supports and encourages increased meaningful engagement between companies and investors on all governance matters. We welcome the approach proposed by the FRC in relation to how companies should engage with investors on all areas of concern identified at shareholder meetings, and not just in relation to remuneration. Further consideration must be given to some aspects of the proposed revisions, including contemplating how mechanisms enabling the recovery or withholding of sums will operate in practice, whether any limited guidance should be given on when companies should consider applying these mechanisms, establishing a clearer definition of what constitutes a significant vote against at a shareholder meeting, and limiting the potential for boilerplate language on how companies intend to engage with their shareholders. In addition, it should acknowledge the complexity of the voting chain and the difficulties companies may face in identifying their shareholders. Corporate governance disclosures BlackRock regards corporate governance as an important driver of longer-term company performance, and also as an important risk mitigation tool for investors. For this reason, we strongly believe that disclosure on corporate governance arrangements should remain comprehensive and positioned within the annual report. 2
Responses Section II: Remuneration 1. Do you agree with the proposed changes in Section D of the Code? BlackRock believes that executive remuneration packages, including equity-based incentive plans, should be clearly aligned to the stated strategic objectives of the company. As outlined in the letter issued in March 2014 by our Chairman and CEO, Laurence D. Fink, we believe that the focus for companies should be on achieving sustainable returns over the longer term. 1 We therefore believe that the alignment of pay to facilitate the execution of strategy should naturally result in the promotion of sustainable behaviours for the long-term. The proposed revision to principle D.1 more clearly emphasizes the need for remuneration structures to support the long-term success of the company. However, it dilutes an important driver to long-term behaviour, namely that a significant proportion of executive directors remuneration should be performance-related. Compensation structures requiring the attainment of challenging and robust performance demonstrate the link to the execution of strategy. In other words, the performance metrics chosen for the incentive plans should support the execution of strategy, and rewards earned should be proportionate to the level of success in executing upon strategy. We do not have any comments on the proposed revision to principle D.2. 2. Do you agree with the proposed changes relating to clawback arrangements? While we recognise the motivation behind the proposed changes to provision D.1.1 in relation to its provisions on the recovery of sums paid or the withholding of sums to be paid, we reiterate our position as stated in our response to last October s consultation. 2 BlackRock believes that companies should be afforded the flexibility to adopt the remuneration package most suitable to facilitate the execution of their strategy. This includes the ability to put in place the proper tools to mitigate risk. While we are supportive of the concept of recovering or withholding sums, we believe consideration should be given to how such mechanisms will operate in practice. We support the FRC s decision to not specify the circumstances in which clawback arrangements might apply, as we believe this responsibility lies with the individual companies Boards of Directors. However, we believe that the UK Corporate Governance Code should continue to provide high-level guidance on its provisions. We question whether the removal of the wording altogether from Schedule A removes this guidance and seek clarification from the FRC on that topic. 3. Do you agree with the proposed changes relating to AGM results? Is the intention of the proposed wording sufficiently clear? BlackRock welcomes the approach proposed by the FRC to encourage companies to proactively engage with their shareholders on proposals which received a significant minority vote against. Broadening the scope to cover all proposals, rather than just those dealing with remuneration, is a positive step toward rebalancing the focus of engagement to governance more broadly. BlackRock believes that good corporate governance, driven by a strong board and executive leadership and by sound governance policies, protects and enhances long-term shareholder value. Therefore, engagement should focus on the wider governance themes such as strategy, board composition and skill set, succession planning, and risk mitigation, as these are the key areas through which investors can assess the quality of management and oversight. Our experience has been that poor remuneration structures are the result of poor governance, rather than the cause of poor governance. Therefore, discussions on 1 See BlackRock s letter to companies encouraging a focus on long-term growth strategies, March 2014. http://www.blackrock.com/corporate/en-gb/literature/publication/letter-to-corporates-fink-032114.pdf 2 See BlackRock s response to the FRC consultation on Directors Remuneration, December 2013. http://www.blackrock.com/corporate/en-gb/literature/publication/directors-remuneration-frc-121313.pdf 3
remuneration are relevant in relation to facilitating the execution of strategy and as an indicator of the quality of governance, but should not be the dominant theme. In our view, the FRC can further clarify what constitutes a significant minority vote. As stated in our response to last October s consultation, we believe this will vary from company to company, and therefore the FRC should work with companies to help define when they should consider making this additional statement. We are also concerned that the risk exists that boilerplate language can be used to describe how companies intend to engage with shareholders to assess their concerns. If this provision results in boilerplate language, it will add little value. Also, as stated in our response to October s consultation, the voting chain is operationally complex, especially in a cross-border context. It will be challenging for some companies to know exactly who their shareholders are, let alone which shareholders withheld support. Similarly, there could be some difficulty in reaching smaller or retail shareholders before the next general meeting, as the beneficial ownership details may not be transparent to the company. The European Commission in its proposal for a revised Shareholders Rights Directive includes a new chapter on shareholder identification to give the possibility to companies to request the name and contact details of their shareholders from the custodians. We support measures which will improve the reliability and accuracy of proxy voting provided that the information sought is for the shareholder and not the end beneficial owner and that data privacy set out in contractual arrangements is respected. In addition to these operational complexities, some shareholders may not be willing to engage. However, companies with good corporate governance practices will have already been engaging with their shareholders on a regular and consistent basis, including having meaningful dialogue including on remuneration. Therefore, if the shareholders are following the principles of the FRC Stewardship Code, companies should already know which of their larger shareholders withheld support. 4. Do you agree with the proposed amendments to the Schedule? BlackRock is generally supportive of the proposed amendments to Schedule A. However, as part of the flexibility afforded to Remuneration Committees to design the remuneration package most suitable to facilitate the execution of strategy, consideration should be given to the company s industry and its business cycle. This would also apply when determining performance and/or holding periods. Additionally, consideration must be given to how a postemployment holding period would be enforced. Section V: Location of corporate governance disclosures 11. Should the option of giving companies the possibility of putting the full corporate governance statement on their website be considered further? If so, are there any elements of the corporate governance statement that should always be included in the annual report? 12. Are there any disclosure requirements in the Code that could be dropped entirely? BlackRock strongly believes that information on corporate governance arrangements should be disclosed in the annual report. BlackRock regards corporate governance as an important driver of longer-term company performance. While we appreciate that good governance alone does not generate financial returns, in our experience, well-managed, well-led companies with clearly understood strategies, sound operational practices and a focus on the future tend to deliver more consistent returns over time. We see good governance as the ultimate risk-management strategy, and crucial to investors. For this reason, disclosure on corporate governance arrangements should remain comprehensive and positioned within the annual report. We 4
would support disclosure of this information on company websites as well, if desirable; however, this should not replace disclosure in the annual report. Conclusion We appreciate the opportunity to address and comment on the issues raised by the Consultation Document and will continue to work with the FRC on any specific issues which may assist in improving the UK Corporate Governance Code. We would welcome any further discussion on any of the points that we have raised. Yours faithfully, Jennifer Law Vice President Corporate Governance & Responsible Investment jennifer.law@blackrock.com Joanna Cound Managing Director Head of EMEA Government Affairs & Public Policy joanna.cound@blackrock.com 5