Category Institutional Investors

Summary of Larry Fink’s 2019 Letter to CEOs

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Early this week, Larry Fink, the Chairman and CEO of BlackRock, issued his annual letter to CEOs of public companies in which BlackRock is invested. If you haven’t already done so, go read Mr. Fink’s 2018 letter to CEOs before proceeding (it will help you better understand this year’s letter). I’ll wait.

Click HERE to access Mr. Fink’s 2018 Letter to CEOs

Okay. So now you know that in 2018 Mr. Fink urged CEOs to detail their strategy for long-term growth, starting with their company’s purpose. Mr. Fink also announced that BlackRock would be a bit more active in ensuring that BlackRock’s index funds looked at how the companies they held stakes in were going to ensure long-term growth. The 2018 Letter announcement marked a significant change in how index funds at BlackRock would operate. Given BlackRock’s size, this change will have an impact on both the public companies in which it holds stakes as well as other index funds.

In his 2019 Letter, Mr. Fink further refines his message and indicates that laying out a purpose alone is insufficient. Instead, companies need to articulate how they will generate profits long-term and serve all of its stakeholders effectively.

Mr. Fink’s 2019 Letter also asks that CEOs provide leadership (where they can) to help tackle and perhaps solve, social and political issues that are confronting the countries, regions, and communities in which their companies operate. One of these critical issues is retirement. Mr. Fink believes corporations need to reassert their traditional leadership role with respect to retirement that they used to hold. Mr. Fink sees helping workers navigate retirement as leading to the creation of not only a more stable and engaged workforce, but also a more economically secure population in the places a company operates.

Noting the shift in attitudes of the younger generation and the impending large trans-generational asset re-allocation, Mr. Fink argues that corporate valuations will be influenced by the shift in values between the current and younger generations, and companies should recognize that shift and start acting in a manner that will minimize the impact on their valuations.

Finally, Mr. Fink announced BlackRock’s Investment Stewardship engagement priorities for 2019:

  • governance, including a company’s approach to board diversity
  • corporate strategy and capital allocation
  • compensation that promotes long-termism
  • environmental risks and opportunities, and
  • human capital management.

Mr. Fink indicates that BlackRock will not focus on a company’s day-to-day operations, but will seek to understand a company’s strategy for achieving long-term growth. He also reiterates what his 2018 Letter said, “for engagement to be productive, they cannot occur only during proxy season when the discussion is about an up-or-down vote on proxy proposals. The best outcomes come from a robust, year-round dialogue.”

Click Here to see Mr. Fink’s 2019 Letter to CEOs

CtW Engages Companies on Anti-Competitive Employment Practices

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On August 29, 2018, the activist investor, CtW Investment Group, kicked off a new initiative to engage 30 major companies (click HERE to see the list of companies) concerning their use of anti-competitive employment practices, including non-competes, no-poach agreements, non-disclosure agreements, and mandatory arbitration. CtW asked each company it contacted to:

  • Review its employment contracting practices, including the use of any of these provisions.
  • Report the board’s findings to shareholders before the next annual meeting.
  • Commit to increased human capital management disclosure going forward.

CtW was concerned about the potential liability and costs associated with such anti-competitive practices.  CtW also sees these anti-competitive practices as constraining the ability of individual workers to seek out new opportunities, causing an artificial limit the pool of potential matches available to employers. CtW sees the recruiting difficulties reported by many employers and attributed to “skills shortages” as more plausibly explained by the limits of workers mobility that employers themselves impose.

CtW made available several documents about its efforts (click for the source documents):

We will have to wait and see what impact CtW’s initiative has on these anti-competitive practices.  But, if my removing these impediments to worker mobility ultimately helps companies secure they need to grow their businesses, it should be a win for everyone.  However, it may take some time to get companies, management teams and Boards comfortable with the notion of forgoing these “protections” for their workforce. But, if CtW and other institutional shareholders take up this initiative, and large companies begin to comply, as with most things, it could eventually filter out to a broad swath of U.S. public companies.

A Rose By Any Other Name?

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My ears always perk up when I hear about a “new” compensation design, especially when it revolves around long-term incentives (LTI) and trying to structure them to bring better alignment with shareholders.  So I paid attention several weeks ago when I was at the Southeastern Chapter of the Society for Corporate Governance’s annual meeting and heard a director say that he had worked with a management team to revamp their LTI program to make it better aligned with shareholders for next year  The director was Daniel G. Beltzman, director of Regis Corporation, who is also General Partner, Birch Run Capital Advisors, LP, an investor in Regis Corporation.

Critical Points of Regis Corporation’s FY19 LTI Design

  • One LTI Grant equal to 3.5x FY2018 LTI grant in FY19
  • Covers 5 years of LTI grants for an initial grant in FY19 covering approximately 3.5x the 2018 annual LTI grant (about 70% of what a participant would have received as annual grants over the 5-year period)
  • No additional LTI grants until after the 5 year period
  • Participants can get additional shares if they elect to defer up to 50% of their net, earned annual cash incentive into shares of company stock, for which the company will make a grant of RSUs equal to 200%. These RSUs have 5-year cliff vesting.

Initial Thoughts

This design is rather unique and more closely aligned with how LTI is structured in a company that is owned/controlled by private equity. It requires executives to invest money in the business to maximize their potential rewards.  Theoretically, this should help ensure that the executives will remain focused on what will drive the company’s stock price higher.

This plan will work so long as executive believe there is an upside to the company’s stock price in the mid-term, 5-year period.  If they decide there isn’t, they may go looking for new challenges, especially if the company enters into a scenario where the annual cash incentive plan doesn’t pay out and there is no additional investment possible in company shares which will be matched.  As long as the future looks bright for the company (at least from an executive perspective), this plan should help drive focus on the company’s goals that will lead to an increased stock price.  But, if the company’s prospects dim, then this design could cause some serious issue with morale and retention and could lead the company to award some form of supplemental incentives. This might increase the cost of this design to be higher than a traditional annual LTI grant-focused design.

The good news is that one of the company’s shareholders has already backed this design (and even helped create it).  So the company should not face the issue of trying to effectively communicate this design to all of its shareholders to convince them it is a good thing. Having a significant shareholder represented on the board and taking an active part in developing this design should ease concerns of other shareholders and make their buy-in to the design less of an issue for the company.

The real test of this design will be what happens.  No one has a crystal ball. Sometimes you have to design the best plan you can at the time given everything you can see and predict. If the future is bright for the company and no significant headwinds come to press against it and throw a spanner wrench into the works, then this design could be quite useful.  We will have to wait and see how things look in FY 2025 to be able to gauge if this design is a winner.  Furthermore, we will have to wait to see this design tested against falling company and market fortunes to see how well it holds up.  But for companies that have significant owners that want a “better” alignment between executives and shareholders, this design might offer at least another alternative to consider.  Time will tell whether LTI designed in such a way will smell as sweet as the typical, annual LTI grant approach.

For more information, please see Regis Corporation’s proxy statement filed for 2019, the CD&A begins on page 19, and the new FY19 LTI program is detailed starting on page 21:

https://www.sec.gov/Archives/edgar/data/716643/000114036118037937/bp11671x1_def14a.htm#regis-def14a_102318a11

 

Related EC Minute Episode

Episode 28 of the EC Minute also covers Regis Corporation’s new LTI design for fiscal 2019.

http://www.ecminute.com/2018/10/31/episode-28-a-new-lti-design/

MSCI Seeking Strategic Alternatives for ISS

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This morning MSCI Inc. announced that it will be seeking strategic alternatives for its Institutional Shareholder Services, Inc. (ISS) business [you can read the press release here: http://www.issgovernance.com/pressISS103113] . This represents the start of a process that may eventually lead to a full separation of ISS from MSCI. However, as MSCI points out, it is not certain that any transaction will occur with respect to ISS.

MSCI joins a growing list of companies that controlled ISS only to find that it might not provide the right synergies with corporate-focused sales and services (since many corporate issuers have a big issue in buying anything from a company that controls ISS).

Frankly, depending on the outcome of this process, it could lead to some significant changes to ISS policies, both current and future, as well as to the policy development process.  It might be time for ISS and MSCI to consider what transpired when Glass Lewis & Co. put itself on the block a few years back and ended up being purchased by the Ontario Teachers’ Pension Plan Board (“OTPP”) and Alberta Investment Management Corp. (“AIMCo”).  It may make sense for a consortium of large institutional shareholders to acquire ISS and effectively use it as their “outsourced” research office. The research could then continue to be sold to other institutional shareholders and corporate issuers.  We’ll have to wait and see what alternatives get explored and where things come out and if it means any change for ISS.