2 0 1 6 Q4 INVESTMENT STEWARDSHIP: ASIA- PACIFIC REGION INCLUDING JAPAN B U I L D I N G C O N N E C T I O N S for the long term
2 0 1 6 Q4 QUARTERLY REPORT DECEMBER 31, 2016 Table of Contents Engagement with Issuers and Statistics Voting Highlights and Statistics Active Ownership and Responsible Leadership Market Development and Trends B U I L D I N G C O N N E C T I O N S for the long term
Engagement with Issuers¹ and Statistics Japan Engagement Statistics² Level of Engagement³ Topics Discussed Number of engagements Basic Moderate Extensive Environmental Social Governance 21 8 10 3 2 2 21 APAC ex Japan Engagement Statistics² Number of engagements Basic Moderate Extensive Environmental Social Governance 7 3 4 0 1 1 7 We continue to engage with companies on matters of long-term value and board leadership, and BlackRock s Asia Pacific based Investment Stewardship team conducted approximately 28 company engagements in the fourth quarter. These discussions typically focused on business strategy, compensation, board composition and skills, sustainability, and capital allocation, among other matters. We believe that this private, issues-based dialogue is helpful in building mutual understanding, and can better position us to effectively engage on behalf of clients in the event of some future concern regarding a particular corporate governance issue or proxy proposal.. ¹ The companies referred to are for illustrative purposes only and not as a recommendation of any particular securities. ² The Asia Pacific including Japan Engagement Statistic Report is a reflection of 4th Quarter 2016. ³ Basic engagement is generally a single conversation on a routine matter; Moderate engagement is technically more complex and generally involves more than one meeting; Extensive engagement is technically complex, high profile and involves numerous meetings over a longer time frame. 3
Voting Highlights and Statistics APAC Region Voting Statistics 4 Country Number of meetings voted Number of proposals % of meetings voted against one or more management recommendations % of proposals voted against management recommendation Australia and New Zealand APAC ex Japan, Australia and New Zealand 279 1,485 19% 3% 927 5,609 19% 11% Japan 145 1,123 40% 8% APAC Region Total 1,351 8,217 22% 9% Highlighted below are several high profile shareholder meetings and/or engagements that particularly demonstrate our efforts to protect the long-term value of clients assets. 1 Australia BlackRock reached out to company representatives of an Australian listed global provider of property and infrastructure solutions in relation to management proposed amendments to its Constitution. One of the proposed changes would have placed a cap on the maximum number of directors on the board. While BlackRock believes the board is normally best placed to determine the size of the board, we also expect board size to reflect the size and complexity of the company. Further, we believe that shareholders should have the ability to nominate for the board and, should they receive a majority of votes, be able to take their position on the board. BlackRock, therefore, does not support changes to constitutions which are likely to restrict the ability of shareholders to nominate for or to be elected to, the board. Despite our engagement on these issues, management maintained its position, and it ultimately resulted in our voting against the proposal. Shortly after this engagement, the company announced its intention to withdraw the proposed resolution in question on the basis that it did not expect the resolution to pass on a poll given it required a 75% majority. The companies referred to are for illustrative purposes only and not as a recommendation of any particular securities. 4 The APAC Region Voting Statistic Report is a reflection of 4 th Quarter 2016 and sourced from ISS Proxy Exchange on January 3, 2017. 4
2 Prior to the proxy season BlackRock engaged with a large Australian listed property group regarding the structure of its executive remuneration. Based on those discussions, we were comfortable with the structure and the expected quantum of 2016 total remuneration for the CEO and his direct reports. However, when the remuneration report was analysed we had concerns regarding the disclosure around the CEO s short term incentive (STI) being transferred to the equity based long term incentive (LTI). The report was also unclear on the total value of remuneration packages for the senior executives, how benchmarking was undertaken and the expected changes to the remuneration s structure going forward. The company, to its credit, released more information based on our concerns. While the additional information did not completely answer our questions, we had continuing conversations with the chair of the remuneration committee. Given the company s public response to our concerns, accessibility to the remuneration chair and a commitment from him to continue dialogue we supported the remuneration report. We will continue to monitor the remuneration structure and intend to maintain regular engagement with the chair of the remuneration committee. 3 TAIWAN Under Taiwan law the whole board is subject to re-election at least every three years. The process requires all directors to retire, however they can seek reelection. A Taiwan-listed financial company brought forward the meeting to elect/reelect directors. The move was considered unusual as there had been rumours in the market around a takeover by a substantial shareholder. The decision to call the board election earlier was viewed by some market observers as an attempt to fend off the takeover. During the conversation with BlackRock, the CEO made it clear that the shareholder in question had indicated it had no intention of making a takeover nor seek board positions. The CEO commented that the meeting for the election of directors was brought forward because one of the incumbent independent directors was moving out of Taiwan and this gave the company the opportunity to make improved governance changes to the board. Specifically, the board proposed reducing the number of non-independent non-executive directors by two to form a board of seven, comprised of four independent directors and three non-independent non-executive directors. BlackRock supported the management nominees based on the clarification provided. BlackRock also raised concerns about the lack of clarity around the disclosure of director remuneration. The company acknowledged the deficiency in disclosure and agreed to have follow-up conversations with BlackRock on this topic. 4 JAPAN The 2016 Japan proxy season continued to have a high number of shareholder proposals (11 in total) relating to capital allocation, to include dividend pay-out ratios or share buybacks. BlackRock generally supports management on such issues on the basis the company has clearly disclosed how the capital allocation plan is aligned with growth strategies and the overall long-term vision of the company. However, in some cases the decision was made to support a number of the shareholder proposals which requested an increase in distributions to shareholders as these companies appeared to have sufficient cash to fund 5
on-going and foreseeable investment plans. Further, in all these cases management had failed to provide a clear explanation to shareholders as to why the current strategy was superior to the one proposed. The oil refinery industry in Japan continues its consolidation and restructuring efforts as the industry remains plagued by overcapacity as a result of decline in demand, given the dwindling population, increase of fuel-efficiency of vehicles and the gradual shift to electric vehicles. BlackRock met with two companies which had announced their decisions to merge in order to further understand the terms of the merger, the long term strategy of the proposed merged entity. Based on our discussions it was clear that both companies were committed to the merger, there were clear strategies relating to rationalization of the supply chain, manufacturing and, most importantly, a successful integration of the corporate culture of both companies. As such, we supported the merger. 6
Active Ownership and Responsible Leadership Speaking Events Members of the team spoke at a number of events over the past quarter, with the objectives of furthering the public policy debate on matters deemed important to investors, and/or promoting an increased understanding of BlackRock s approach to corporate governance. We target events that enable us to connect with key stakeholders and thought leaders, including corporate directors, senior members of management teams, and other shareholders. The following is a list of select speaking events from the quarter, and subject matter covered: Sodali Consulting Shareholder Engagement Webinar - Asia BlackRock was asked to present in a webinar organized by corporate governance consultant Sodali to a group of issuers listed in Asia. The topic was shareholder engagement. Practising Governance Shareholder Activism seminar - Hong Kong BlackRock presented at a seminar on shareholder activism organized by Practising Governance, a corporate governance consultant based in Hong Kong. BlackRock introduced the way it fulfils stewardship responsibilities as an investor and how it engages with companies. The seminar audience was mainly issuers listed in Hong Kong. 7
Active Ownership and Responsible Leadership JP Morgan Shareholder Engagement Tele-presentation - Taiwan BlackRock was asked to present through teleconferencing to a group of issuers listed in Taiwan to introduce how BlackRock does voting and engagement. Securities and Futures Institute of Taiwan - Taipei BlackRock participated in a panel discussion on corporate governance in Taiwan. Attendees included regulators, issuers and investors. BNP Paribas Conference - Singapore BlackRock participated in a panel on sustainability and governance covering best practice for boards and CEOs. Attendees included issuers, investors and regulators. Malaysian Institute of Accountants Conference on Integrated Reporting Kuala Lumpur BlackRock participated in a panel discussion on the benefits to investors of quality integrated reports. Attendees were Malaysian issuers. 21st century Principles of Financial Action symposium, Ministry of Environment - Tokyo BlackRock participated in a seminar hosted by the Ministry of Environment to present on the topic of investor expectations and views on the recent developments of corporate governance in Japan. Seminar hosted by Mori Hamada & Matsumoto - Tokyo BlackRock participated in a seminar on director remuneration and recent corporate governance developments in Japan. The seminar attracted over 2,000 representatives from listed Japanese companies. ACGA Japan delegation - Tokyo BlackRock presented to a group of global institutional investors on the history and recent developments of corporate management and corporate governance in Japan. Integrated Reporting Seminar, hosted by Integration Summit - Tokyo BlackRock participated in a seminar on integrated reporting. The seminar attracted around 100 representatives of listed Japanese companies. Audit Committee Network Seminar hosted by PricewaterhouseCoopers - Arata BlackRock presented an investor s perspective on corporate governance in Japan. The panel attracted over 150 non-executive directors from listed companies. 8
Market Developments and Trends The Philippines BlackRock submitted a response to the public consultation by the Securities and Exchange Commission (SEC) of the Philippines on its Draft 2016 Code of Corporate Governance for Publicly-listed Companies (draft Code). Our main suggestions (available here) included: Upgrading many of the recommendations that would be implemented on a comply-or-explain basis under the draft Code to mandatory requirements given the significance of recommendations such as the establishment of an audit committee and related-party transaction (RPT) committee, and the disclosure of the nature of non-audit services performed by the external audits. Adopting a provision in the Listing Rules to require RPTs to be approved by the majority of independent shareholders by way of a resolution at shareholder meetings, given that abusive RPTs are regarded by most international investors as one of the key corporate governance issues in the Philippines. Incorporating a provision in the Listing Rules to require independent shareholder approval for any share issue including shares issued as (part of) the consideration associated with asset acquisitions or restructuring where preemptive rights are not given to all shareholders. Massively dilutive share issues have long been another key corporate governance issue in the Philippines. 9
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