Tougher Tone by BlackRock and Vanguard on Governance Shows Impact of Shareholder Activism

March 13, 2015

Two of the largest U.S. institutional investors will pay closer attention to shareholder rights and director tenure in 2015, according to BlackRock's updated proxy voting guidelines and a recent letter Vanguard sent to several hundred of its portfolio companies, with the changes driven in part by pressure from shareholder activism.   Vanguard CEO William McNabb III sent letters to several hundred of the fund company's portfolio companies recently, noting that Vanguard will actively engage and hold companies accountable for corporate governance issues.  In a Wall Street Journal article, McNabb indicated that the rise of shareholder activism has pushed Vanguard to expand its corporate governance team.  The letter to companies notes that "directors should invite communication with those shareholders who may have a legitimate interest in gaining a deeper understanding of board oversight of succession, compensation, or risk management" and that it believes that matters such as CEO compensation "are appropriate for discussion with the board alone," rather than with management because they are "the exclusive province of the board."  This places a greater focus on ongoing engagement with directors (as opposed to management) than has previously been the case.  Meanwhile, beginning in 2015, BlackRock, the world's largest institutional investor, may vote against company directors if it perceives issues with company board tenure, board diversity, director meeting attendance, and treatment of shareholder rights, although the changes are not expected to significantly change its voting patterns.  According to Michelle Edkins, BlackRock's Global Chief of Corporate Governance and Responsible Investing, the changes reflect its "evolving expectations of public company boards and directors."  The new guidelines state that BlackRock may vote against a company's directors if (1) the company lacks board diversity; (2) evidence exists of "board entrenchment"; and/or (3) the company fails to "promote adequate board succession planning over time in line with the company's stated strategic direction."  BlackRock will also consider voting against one or more directors if a company takes steps to change corporate by-laws in a way which may curb the rights of shareholders, without consulting shareholders "within a reasonable amount of time."  This could be very important at a time where activist hedge funds are frequently buying large stakes in companies and injecting themselves into day-to-day management decisions.