Wednesday, June 17, 2009

BlackRock Has Power to Influence

06/17/09 - 02:18 AM EDT


Eric Jackson

BlackRock's(BLK Quote) announcement last week that it would purchase Barclays Global Investors from U.K. bank Barclays(BCS Quote) for $13.5 billion confirmed that BlackRock would yield an enormous influence on corporate America.

In fact, the combined firm will own $2.8 trillion in assets, twice the size of its nearest rivals State Street (STT Quote) and Fidelity, which hold $1.4 trillion in assets each.

If you've looked up recently the shareholder ownership tables for any large or small public company, you likely have seen BGI's name among the top five holders of the stock. You've also likely seen BlackRock's name in the top 10. And, with this deal, you will now almost certainly see the new BGI (BlackRock Global Investors) in the list of top three or four shareholders.

Most financial analysis of this BlackRock-BGI tie-up have focused on the price paid, the assets now under management and the growth of BGI over the last few years as an asset for Barclays. Barclays certainly owned a jewel that they wouldn't have parted with unless external capital demands from the British government required it, and also unless BGI's own executives had a compensation structure that incented a full sale. BGI accounted for 15% of Barclays' pretax profit last year.

Yet, there's another interesting question about this tie-up that has gone unmentioned: How will this new BGI behemoth vote its shares in future corporate elections?

Until now, BGI has had a reputation among some for being a shareholder that largely votes its shares in favor of management. A third-party Web site, Proxy Democracy, founded last year by Harvard Ph.D student Andrew Eggers, which tracks how large institutional investors actually vote their shares, recently ranked BGI's family of funds at the 11th percentile in terms of their "overall activism score." This means that 89% of other mutual funds tended to vote in a more pro-shareholder fashion at corporate elections than BGI.

BGI says it has a team of 12 full-time staff globally who are fully dedicated to analyzing and executing corporate governance policy. Seven of those staff are located in the U.S. and are tasked with a special focus on North American assets.

Abe Friedman, BGI's global head of corporate governance, heads this group and is a managing director of the firm. Additionally, BGI claims to vote in 100% of the votes it is eligible to participate in every year. BGI also says it follows a rigorous set of proxy voting guidelines in deciding how to vote.

Given this level of staffing, it's puzzling that BGI's pro-shareholder voting record, according to Proxy Democracy, is so low. Eggers told me recently that BGI has been particularly low in supporting shareholder resolutions and proposals that aim to rein in executive compensation. According to their voting record posted on the site, BGI has supported management on executive compensation in 95.4% of the votes . That's particularly noteworthy, given last week's news that 400 senior Barclays' executives would receive a "windfall" $630.3 million payout from BlackRock for selling BGI, prompting shareholder outrage. BGI Chairman Bob Diamond will pocket $36.5 million from the sale, while BGI CEO Blake Grossman, will take home $91.2 million. If that's the example set from the top of BGI, I'm not surprised that the voting record says BGI supports management on executive compensation issues at such a high rate.

A couple of years ago, when I ran an activist campaign targeting Yahoo!(YHOO Quote), I reached out to all the large institutional holders of the stock leading up to the annual meeting. I had made the public argument that a few Yahoo! directors deserved to be voted off the board because of the company's poor performance and general misdirection (most of the directors I identified are still on the board, by the way).

Of the 10 largest institutions holding Yahoo! stock, I spoke with eight. Most portfolio managers covering the company or governance officers already were aware of some of my arguments about the company before I spoke to them on the phone.

BGI was one of the two institutions better protected than Fort Knox in terms of being open to discussing the issues that Yahoo! was facing. I first called BGI's San Francisco office and asked to speak to Mr. Friedman. I was told that he was no longer with the firm. I asked to speak with people on his team. The receptionist seemed confused and said that such a team wasn't in place. After calling again and asking to speak to someone responsible for voting BGI's shares, I was put to a woman's voice mail. I never received a return call.

One last attempt and voice mail message also were unsuccessful in at least having a discussion about the issues at play in the vote. Based on these interactions with the firm, I assumed no governance team existed at BGI (which I understand now is not the case; they were just simply difficult to get in touch with). Maybe I was just unlucky in my phone calls. However, at eight of the other top 10 holders of Yahoo!'s stock, who presumably were just as busy as BGI in determining how to vote their shares, I found it very easy to engage in a discussion.

Corporate governance is seen by the vast majority of institutional holders as an investment that creates far more value to their clients than the cost. I'm quite sure that if clients of these large institutions knew which ones were responsibly voting their shares on the clients' behalf, and which ones were rubber-stamping votes for less effective CEOs and boards, there would be ramifications seen through large-scale transferring of assets.

That's why sites like Proxy Democracy are so important. All of these large institutions need to be held accountable for how they vote their shares on behalf of clients. These institutions also need to understand that, it's not important how often you vote, or how many people you employ in order to vote, but how you vote your shares that matters to clients.

And this brings us back to BlackRock and the new BGI. BlackRock does have a reputation for speaking up and voting in favor of shareholder-friendly matters. On the Proxy Democracy site, BlackRock's activism score was at the 41st percentile, meaning the company is about average compared with it peers in supporting pro-shareholder votes.

As Barron's pointed out last weekend, BlackRock is also known for its much more active than passive culture compared to BGI. CEO Larry Fink has said one of the great virtues of this deal is that 80% to 90% of the two firms' activities do not overlap and can be left as is. I hope Fink will look closely at how the new BGI votes its shares and steers it closer to the BlackRock model and away from the Barclays model.

If Fink does this, and I have every reason to believe he will, the new BGI has a chance to play a powerfully positive role in voting its shares in future corporate elections.

In my view, sleepy boards and managements just lost one big chip of votes that, until now, they could count on being in their back pockets. All shareholders will benefit if there is a change in philosophy at BGI.

At the time of publication, Jackson had no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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