Synthesizing the Messages from BlackRock, State Street, and T. Rowe Price

Pamela L. Marcogliese is a partner, Elizabeth Bieber is an associate, and Brennan K. Halloran is a law clerk at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

It has become customary, over the last few years, for companies and other stakeholders to await annual letters from large institutional investors that provide insight into investor views about companies’ long-term strategy, messaging, goals and shareholder engagement, among other topics.

BlackRock and State Street recently released their letters, and shared similar views: BlackRock reiterated its focus on the need for corporate purpose and the link to successful pursuit of profit and State Street focused on the need for a meaningful corporate culture as a significant driver of intangible value. In addition, in a recent interview with Gladstone Partners, Donna Anderson, the head of T. Rowe Price’s governance policy and engagement, focused on the need to deliver financial results instead of worrying about fending off the next activist investor.

As the years pass, the letters and messages to companies have become more specific in the types of causes that each investor focuses on, and, in turn, expects companies to focus on. As companies hit record levels of engagement and the use of one-on-one governance roadshows becomes near-ubiquitous, companies are bringing together legal, finance, ESG and IR teams, as well as other members of senior management and directors to develop materials and messaging intended to demonstrate advanced levels of engagement and prove they are listening to their investors’ concerns.

But, we are starting to see evidence, through the annual letters, interviews and other public-facing interactions, that investors have become more sophisticated about what they expect from companies, and how company-developed engagement should function. As a result, the recent letters and sentiments express nuanced and increasingly specific views about investor expectations, and companies that wish to court favorable impressions would be wise to understand the individual expectations.

On a practical level, that ideally results in taking investor concerns into consideration when crafting disclosure, ESG reports, investor day presentations, analyst calls and other forums for public interaction. But it also means that companies ought to be thoughtful in their governance roadshows and tailor their presentations to what they now know individual investors are most focused on.

Show BlackRock The Company Has a Purposeful Mission

BlackRock made clear [1] that it wants to see that companies are not only delivering dividends to its shareholders, but also delivering figurative dividends to the world at large. In what is a more pointed version from prior Fink letters, this year BlackRock encourages companies to take up the mantle and to address a variety of “pressing social and economic issues.” Such pursuit should be engrained into the fabric of each company, not peripheral to its profit motive. Indeed, Fink argues the drive for profit and the drive to better the world are “inextricably linked”: and that this trend will continue in importance as millennials occupy more senior positions in leadership. Millennial customers want to buy from, millennial employees want to work for, and, increasingly, millennial investors want to invest in, companies that have a purpose. And once millennials are the dominant economic generation, they will demand that companies have a purpose—any company that does not take on forward-looking responsibilities will be left behind.

Fink’s letter left little room for creative interpretation. To impress BlackRock, a board is encouraged to answer Fink’s call—which, in turn, is to convince BlackRock you are answering society’s call by focusing on board diversity, corporate strategy and allocation, compensation that promotes long-termism, environment risks and opportunities and human capital management. In particular, Fink called upon companies to come up with innovative solutions to solve the growing retirement problem: For years, according to Fink, both governments and companies alike have attempted to shift their burden of funding employees’ retirement to the other. Embracing a responsibility for retirement will create a more secure economic population, but also a stable and engaged workforce. But more pointedly, BlackRock has mentioned, in multiple annual letters, the need for a stable and engaged workforce through retirement education and empowerment, and it is becoming clear that issues related to human capital management and its role in attracting and retaining talent is critical.

And while the tone of the BlackRock letter certainly has a near social-justice undertone, the link of purpose to profit should not be underestimated—at the end of the day, through its engagement efforts, BlackRock is looking for companies to demonstrate how “the company’s purpose informs its strategy and culture to underpin sustainable financial performance.” All of BlackRock’s focus is an attempt at molding how companies should best view their ability to make and maintain profits.

Show State Street the Company Has a Corporate Culture—and a Way to Measure it

State Street made clear, via its 2019 letter to boards of directors, [2] that it wants companies to facilitate productive, top-down corporate cultures. Simply stating a corporate culture exists is necessary, but not sufficient. In State Street’s view, the test of culture is measured against its relationship to long-term corporate strategy. State Street encourages companies to analyze whether its culture and strategy are indeed aligned and to implement processes by which relevant stakeholders can report candidly to the board regarding strategy and culture, and, in turn, permit the board to monitor a company’s strategy and purpose actively. However, State Street made the important distinction between managing and monitoring culture and strategy—management should be tasked with managing, and the board should be tasked with identifying, and, if necessary, plotting a path towards rectifying, any deficiencies in or gaps between a company’s corporate purpose and corporate strategy.

Like BlackRock, State Street plainly laid out what it wants to see from public boards: tangible progress towards identifying, facilitating, and improving one’s corporate culture and strategy. Boards are therefore encouraged to describe clearly their views on the corporate culture and long-term corporate strategy, and to delineate specific (and measurable) steps to achieve related goals. Companies can have effective meetings with State Street by describing the oversight mechanisms in place to identify and monitor corporate strategy and purpose and how the board thinks about improving and aligning the relationship between corporate strategy and culture.

Show T. Rowe Price the Company is Proactive—not Reactive

T. Rowe Price, via Donna Anderson’s interview with Gladstone Place Partners, [3] delivered a tried and true message: tell us why you did what you did and why you are doing what you are doing. A board’s answer to those questions should be centered upon their own company’s goals and corporate position—not exogenous factors. Specifically, T. Rowe Price chastised companies for their short-term focus on defending against activism and making resulting impracticable decisions, despite what T. Rowe believes is a low-risk to being a target. In particular, Ms. Anderson criticized the stock buyback trend as an overused tool that should be used tactically, not to solely demonstrate a defined short-term use for capital.

Successful engagements with T. Rowe Price will likely feature discussions that underpin that sound financial planning and long-term considerations undergird corporate decision-making. T. Rowe Price indicated their willingness, in some situations, to be a patient investor so long as the decisions are thoughtful and investors are apprised of long-term plans. It is less clear how patient investors will be with poor performance, even only for the short-term, but understanding that T. Rowe, and perhaps other investors, want to hear a company “show its work” when presenting corporate decisions is a helpful tool for successful engagement. In particular, Ms. Anderson notes that she prefers engagement to be short, sweet, and not tied to a presentation.

Endnotes

1BlackRock, Larry Fink’s 2019 Letter to CEOs: Purpose & Profit, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.(go back)

2State Street, Aligning Corporate Culture with Long-Term Strategy (Jan. 15, 2019), https://www.ssga.com/investment-topics/environmental-social-governance/2019/01/2019%20Proxy%20Letter-Aligning%20Corporate%20Culture%20with%20Long-Term%20Strategy.pdf.(go back)

3Talking Governance with Donna Anderson (Jan. 10, 2019), https://corpgov.law.harvard.edu/2019/01/10/talking-governance-with-donna-anderson/.(go back)

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