The Advisors' Blog

On Tuesday, Blackrock Investment Stewardship released its 2022 Investment Stewardship Global Principles (with a summary here) and its updated U.S. proxy voting guidelines, which are effective as of January 2022.

When it comes to the 2022 US proxy voting guidelines, the asset manager’s overall approach to executive compensation is consistent with last year’s guidelines – with a striking change. Last year’s guidelines said that where BlackRock concludes that a company has failed to align pay with performance, it would vote against say-on-pay and consider voting against the compensation committee members. In 2022, BlackRock is taking a harder stance. The voting guidelines say:

Where we conclude that a company has failed to align pay with performance, we will vote against the management compensation proposal and relevant compensation committee members.

While BlackRock typically supports say-on-pay proposals (84% globally, and even higher in the US), this policy means that directors will face immediate “against” votes from the asset manager when executive pay packages aren’t approved. This follows an approach started in the pension fund space a couple of years ago that appears to be catching on. Given BlackRock’s holdings and the signal that diminished director support can send to activists, it’s a risk that compensation committees should be made aware of. Here are other executive compensation-related updates to BlackRock’s voting guidelines:

– Reflective of its updated Global Principles on the alignment of ESG metrics with executive pay, Blackrock notes that a company’s “performance-based compensation should include metrics that are relevant to the business and stated strategy or risk mitigation efforts” – and is supportive of incentive-based plans that foster sustainable achievement of both financial AND non-financial results.

– Blackrock previously noted that the vesting timeframes under incentive plans should support long-term value creation – and now notes the holding timeframes should support the long-term focus as well.

– Blackrock previously had language to “consider biennial and triennial timeframes [for say-on-frequency proposals], absent compensation concerns” – this was removed for 2022. Instead, Blackrock believes “shareholders should have the opportunity to express feedback on annual incentive programs and changes to long-term compensation before multiple cycles are issued.” Blackrock may be giving more leeway on incentive plans by underscoring long-term value creation, but it may be balancing that with the ability to chime in annually on executive compensation practices.

– Blackrock previously generally supported proposals asking for shareholder approval of golden parachute plans that “exceed[ed] 2.99x an executive’s current salary and bonus, including equity compensation” – this was removed for 2022, which suggests Blackrock may be less inclined to use specific numeric thresholds to come to a vote.

On the Global Principles, last year, Blackrock added new language on sustainability issues – and this year, it’s largely looking to make more incremental updates. Blackrock flags five notable updates in its 2022 Global Principles relating to climate risk, sustainability reporting, board diversity, ESG in executive compensation and changes to corporate form.  Here’s an excerpt from the summary document regarding ESG metrics in executive compensation – and it’s similar to the approach that Glass Lewis announced last month:

Our principles have long articulated our view that performance metrics for incentive plans should be stretching and aligned with a company’s long-term strategy and business model. BIS looks to the board to set incentive pay targets that are transparent and linked to performance. In response to inquiries from companies, as well as greater interest among other stakeholders, we have added to our 2022 Global Principles that BIS does not have a binary position on the use of ESG-related criteria in compensation programs, but believes that where companies choose to include them, those metrics should be aligned with a company’s strategy and business model and should be as rigorous as other financial and operational targets.

Blackrock notes that these Global Policies are “deliberately high level,” which makes sense given the emphasis on a company-specific approach to ESG metrics. It’s also helpful to refresh on Blackrock’s memo detailing its approach on executive compensation – ESG metrics should be meaningfully tied to the company’s ESG efforts and long-term business strategy.

– Emily Sacks-Wilner