March 16, 2017

BlackRock: Boards Must Address Climate Change & Board Diversity

According to this Reuters article, the world’s largest asset manager has a message for boards – we expect you to act on climate change risk & gender diversity – and if you don’t, you may not be able to count on our vote.

BlackRock recently posted its 2017-2018 engagement priorities, and these issues are at the top of the list. When it comes to gender diversity, BlackRock’s clearly communicates its expectations – and the potential consequences for companies that disappoint them:

Over the coming year, we will engage companies to better understand their progress on improving gender balance in the boardroom. Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions. If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.

BlackRock’s message on climate change is equally forceful:

For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary.

BlackRock also makes a push for more and better disclosure of climate risks.  As with board diversity, BlackRock indicates that it will use its vote to pressure companies who lag on addressing & disclosing climate change issues – and may vote against the re-election of certain directors it deems most responsible for board process and risk oversight.

BlackRock’s emphasis on climate change engagement responds to a now withdrawn shareholder proposal calling upon it to “walk the walk” on climate change.  The proposal – which Broc blogged about last year – criticized BlackRock’s proxy voting record on climate change shareholder proposals & called on it to review its voting policies.

Activism: Has Chief Justice Strine Become “Wolfsbane”?

According to this CNBC article, Leo Strine – Delaware’s “secretly powerful” chief justice – says that hedge funds are “wolves” who damage ordinary investors. Here’s an excerpt:

Strine’s main argument is that the “current corporate governance system … gives the most voice and the most power to those whose perspectives and incentives are least aligned with that of ordinary Americans.”

That has allowed such investors to act and manipulate decisions by corporations that often are not in the long-term best interest of average shareholders, he said. He points to the “continuing creep toward direct stock market control of public corporations,” which he says bears no accountability toward human investors.

Strine’s ideas are laid out in an upcoming Yale Law Journal article, and are consistent with his prior writings expressing concern about whether financial intermediaries appropriately represent the interests of the people whose money they invest.

The Chief Justice’s hedge fund critics have responded to his most recent volley by saying that a justice should not be on the record “condemning a group of people who tend to litigate in his court and the lower Delaware courts,” and that he doesn’t offer much in terms of a fix for what he sees as a flawed system.  None of these critics would agree to be quoted – “fearing retribution from Strine.”

Strine doesn’t condemn all hedge funds – his argument is a little more nuanced than that, and focuses on the need to take consider the impact of short-term activist strategies on the lives of the human beings institutions purport to represent. He also speaks well of an alternative approach that at least one leading hedge fund has already adopted:

Evidence suggests that hedge fund activism is perhaps most valuable when it involves a somewhat rougher form of relationship investing of the kind for which Warren Buffet is known. The activist may need to knock a bit loudly, but once let in, assumes the duties and economic consequences of becoming a genuine fiduciary with duties to other stockholders and of holding its position for a period of five to ten years, during which it is a constructive participant in helping the rest of the board and management improve a lagging company. Nelson Peltz and his Trian Fund Management might be thought of in this manner.

Chief Justice Strine’s an intimidating guy – but he’s hardly the first Delaware judge to use his position as a “bully pulpit.”  Members of the Chancery Court have often written and spoken outside of the courtroom during their tenure – including current Vice Chancellor Travis Laster & former Chancellor William Allen.  That’s just how they roll in Delaware. Other litigants don’t appear to have been too daunted by the scholarship of these “secretly powerful” figures.

Whistleblowers: 9th Circuit Says Dodd-Frank Protects Internal Reporters

This Perkins Coie memo reviews the 9th Circuit’s recent decision in Somers v. Digital Realty – which held held that employees who report securities law violations internally, but not to the SEC, are still protected as “whistleblowers” under Dodd-Frank. The ruling aligns the 9th Circuit with the 2nd Circuit and against the 5th Circuit – and the split may be heading for the Supreme Court.

John Jenkins