PowerPoint Presentation · ³ Basic engagement is generally a ... The company has a good understanding of the public criticisms ... targets corresponding to the strategic imperatives

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16

Q1

B U I L D I N G C O N N E C T I O N S

for the long term

INVESTMENT STEWARDSHIP:

AMERICAS

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16

Q1

B U I L D I N G C O N N E C T I O N S

for the long term

Table of Contents

QUARTERLY REPORT |

▸ Engagement with Issuers and Statistics

▸ Voting Highlights and Statistics

▸ Active Ownership and Responsible

Leadership

▸ Market Development and Trends

MARCH 31, 2016

Table of Contents

CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas

Engagement with Issuers¹ and Statistics

¹ The companies referred to are for illustrative purposes only and not as a recommendation of any particular securities.

² The Americas Engagement Statistic Report is a reflection of 1st Quarter 2016.

³ Basic engagement is generally a single conversation on a routine matter; Moderate engagement is technically more complex and generally involves

more than one meeting; Extensive engagement is technically complex, high profile and involves numerous meetings over a longer time frame.

3

Level of Engagement³ Topics Discussed

Number of

engagements Basic Moderate Extensive Environmental Social Governance

126 94 19 13 7 9 125

Americas Engagement Statistics²

We continue to engage with companies on matters of governance and leadership

with an emphasis on long-term value and board leadership, and BlackRock’s

Investment Stewardship (“BIS Americas”) conducted approximately 126 company

engagements in the first quarter. These discussions typically focused on corporate

strategy, board composition and skills, executive compensation, bylaw

amendments, issues related to capital structure and executive succession planning,

and sustainability reporting, among other matters. We believe that this private,

issues-based dialogue is helpful in building mutual understanding, and can better

position us to effectively engage on behalf of clients in the event of some future

concern regarding a particular corporate governance issue or proxy proposal. The

below examples reflect engagements that merited particular focus on

environmental, social and governance (“ESG”) considerations. We aim to frame

our engagements in the context of long-term value creation.

.We engaged a large developer and operator of residential real estate to hear about

the company’s updated governance features. The board has taken proactive steps

to evaluate the appropriate refreshment policy and chose to adopt guidelines for the

tenure of its directors. Similarly they articulated the expectations of the length of

service of a lead independent director as well as committee chairmen. They

explained that the ideas were put forward by the board in order to demonstrate their

work on assuring fresh thinking and diversity of perspective. Additionally we

discussed positive improvements to the compensation structure, the adoption of

further enhanced governance provisions, as well as director time commitments

required in board service. Given recent controversies, we provided feedback on the

company’s sustainability reporting, which we noted for its exemplary disclosure, but

suggested areas where shareholders may benefit from more detail. We are

encouraged by the proactive actions of the board and will continue our efforts to

engage in a constructive way.

1

CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas4

We engaged with a global insurance company that provides products and services

for commercial, institutional and individual customers. Of late, the company has

faced pressure from two activist shareholders who urged the company to break up,

publicly criticizing its performance, organizational structure and expense

management. The company noted that it was now striving toward a structure built

on the modularity of self-sufficient business units, highlighting that this

organizational structure will make it easier to assess and target potential strategic

opportunities. The company explained that it has already begun exiting from

businesses, and introduced an expense initiative by which it intends to centralize

certain parts of its work force in low cost centers and hubs, relying more on

automation to optimize the expenses. However, the company stated that a break-

up at this point would have a negative impact on shareholder value, reducing

diversification benefits while making less capital available for distribution to

shareholders, among other objections. After discussing these strategic and

structural concerns, we asked about the board’s assessment of the pressure by the

activists. The company indicated that it has engaged with the activists, and that

some of their views on streamlining the company were aligned with the board’s

view. The company further highlighted that the board is open to shareholder views,

had never been prone to entrenchment and board refreshment was ongoing,

having recently appointed directors to add technological expertise. The company

has since settled with the activist shareholders by granting two board seats. We

will continue to proactively monitor developments and engage with this company.

2

We met with a large cap technology company, to discuss with management and

board directors current areas of focus, options being explored for the business, and

specific efforts to create value for shareholders. The company has a good

understanding of the public criticisms levied against it and has a clear vision. The

board and management are working together to make sure that the company has

viable options. We discussed how they will evaluate success, key metrics used,

areas they’ve seen improvement in and reflections on some of the strategic

choices. We also delved into the details of board dynamics and managing external

pressures. Lastly we explored challenges in human capital management and how

they are being addressed. We will continue to engage as the situation evolves.

4

BlackRock engaged a mid-sized tire manufacturer on product safety. Our goal was

to understand how the company evaluates its performance in this area and the

metrics used. The company told us that tire recalls, warranty payments, and

property damage claims were all relevant metrics, and added that it discloses most

of these on the National Highway Traffic Safety Administration website or to the

government as required by law, adjusting these for failures due to outside factors

such as punctures or overloading. The company further explained that it does not

publicly disclose the adjustment data because it considers this information to be

confidential to the business. It has long followed a robust product withdrawal

process before other auto manufacturers began a “new” strategy of proactive

recalls. The company explained the importance of the approach to err on the side of

recalls in order to protect its reputation. We were satisfied with the company’s

approach and explanations.

3

CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT | Americas5

We engaged with a small-cap institution that offers deposit, lending, insurance and

other financial services to individuals, municipalities and businesses, to learn more

about its operations, governance program, and long-term strategy. The company

described its history and operations within the small, regional bank ecosystem. We

discussed its recent acquisitions to better understand what the company believed

were its long-term organic growth and cross-sell opportunities in the region. While

describing its long-term strategy to diversify, the company highlighted the

complementary expertise gained by the recent acquisitions, stressing that given the

specialized customer base, the company targets well-established businesses with

operational history in the region. We asked about the board’s approach to capital

allocation. The company aims to balance keeping a sense of tradition in its regional

operations and modernizing some of its branches so that customer interactivity can

be enhanced through technology. We also discussed CEO succession planning

and management talent review, a process overseen by the compensation

committee of the board. The board conducts bi-annual evaluations of emergency

succession planning, as well as a talent review for the top fifteen positions at the

company. For board refreshment, the directors consider expertise, geography, and

diversity. The three recent director appointments were cited as evidence of board

refreshment, although increasing gender diversity has been difficult as director

nominees need to have a deep understanding of the region, as well skill-sets

specifically identified by the board. We encouraged increasing the company’s

prioritization of recruiting female directors to the board and discussed specific

academic research that correlates gender diversity with better decision-making in

boardrooms.

5

We engaged with an electric power company on its 2016 sustainability report and

environment-focused strategies including a goal to reduce its CO2 emissions by 30

percent by 2035. The company explained that it has a long-term goal to evenly

distribute its power generation between coal, gas/oil, and renewables. The board’s

Nuclear and Environmental Committee meets before every full-board meeting, six

times in the past year. The board is currently examining major investment

decisions linked to the company’s overall commitment to CO2 reductions. It believes

it is ready to meet and mitigate any risks stemming from regulatory changes

following COP21, potential impacts on customer satisfaction rates and energy-

source reliability issues remain concerns. As a result of our engagement, we gained

confidence that the board is well placed to change its strategy should it become

necessary as a result of regulatory changes or an accelerated adaptation to a low-

carbon economy.

6

7 We spoke with two independent directors of a small-cap bio-pharmaceutical

company which focuses on the discovery and development of therapeutics to treat

rare diseases. For the past several years, we engaged with the company around

its problematic executive compensation structure, and the consequent poor Say-

on-Pay results at recent shareholder meetings. During the course of our

engagements, we realized some of the issues – on both strategy and pay – were

partly due to a former CEO’s management style. We engaged with independent

directors to assess how the board is overseeing the transition period. The company

is intently focused on attaining a key regulatory approval for its main asset, while

simultaneously undergoing a CEO succession process. The directors highlighted

recent director appointments that have enhanced the board’s pharmaceutical and

commercial expertise. The directors said the board prioritizes three things


8

6

operationally: the long-term R&D program, expense discipline, and the

organizational structure. We discussed the performance of the interim CEO, his

successful management of the evolution of the internal culture, and the importance

of management’s focus on the goal of FDA approval. The directors reassured us

that performance-based share grants will be introduced to align executive pay with

investor expectations. These performance-vesting equity plans will have milestone

targets corresponding to the strategic imperatives at the company. Time-based

equity grants will be phased out. When asked about the board refreshment process

over the medium-to-longer term, the directors said that the board would look for

candidates with experience in accounting, and expertise in newer technologies,

such as gene therapy. They expressed satisfaction with the interim CEO’s role in

bridging the gap between management and the board which existed under the

previous CEO. Lastly we encouraged better disclosure to provide investors

enhanced insight as to how the company is managing this ongoing transition.

We have engaged with a large logistics company on a number of occasions to

discuss governance matters, including the board’s rotation of the lead independent

director role. More recently the company informed us that the new lead independent

director will serve on a more permanent basis. We believe that this will mitigate

shareholders’ concerns whether the chairman, who is a former CEO, is

independent. The board also believes that having a lead independent director will

enable the board to engage with shareholders more effectively. Additionally the

board extended the performance period for the executive compensation plan from

one to three years. We believe the company has made meaningful progress in both

governance and executive compensation. We will continue to engage with the

company on other governance issues, including its dual class structure and a

number matters raised in shareholder proposals.

9A few years ago, we engaged a large global retailer when allegations of bribery

surfaced at the company. As in previous years, the company’s response to our

questions about the allegations continued to be limited due to an ongoing

investigation. However, beginning early last year, the retailer has engaged with us

on the overhaul of their compliance systems. It has, for example, changed its

whistleblower reporting lines from regional to global headquarters, which the

company maintains is a reflection of a ubiquitous culture of zero-tolerance towards

corruption. With the help of an external audit firm it has also implemented a global

system in which staff can audit any of the company’s more than 9000 third-party

vendors. The company claims to be the only retailer with this capability. Although

we acknowledged the improvements in their anti-corruption program and the

absence of any new incidents, we explained again our rationale for voting against

certain directors over the years. We also asked if the founding family, who have a

controlling stake in the company, have veto power over new board nominees. The

company informed us that the board has a robust board succession plan which

ensures highly talented and experienced directors (many of them have been CEOs)

so there should be no concerns about the family’s control or of director

entrenchment. While we are encouraged by the improvements at the company, we

will continue to monitor developments.


Voting Highlights and Statistics

7

Americas Region Voting Statistics4

Country

Number of

meetings

voted

Number of

proposals

% of meetings voted against one or

more management

recommendations

% of proposals voted against

management

recommendation

USA 379 3,015 19% 4%

Canada 34 249 24% 4%

Latin and

South

America

180 778 44% 23%

Americas

Region Total593 4,042 27% 7%

4 The Americas Statistic Report is a reflection of 1st Quarter 2016 and sourced from ISS Proxy Exchange on April 4, 2016.

In the Americas, the first quarter generally sees relatively low proxy voting volume.

Nonetheless, we continued to vote and engage around annual and special

shareholder meetings.

1A developer and manufacturer of industrial components faced a proxy contest from

an activist alleging underperformance, poor governance, and board entrenchment.

We engaged with both sides to understand the different visions for the company’s

strategy and growth, areas of focus with regards to governance, and the

qualification of nominees to the board of directors. Both sides provided extensive

detail into areas of opportunity in operational cost savings, investments, and client

focus. In our judgment, management was open to exploring all options to maximize

value for shareholders. We signaled to the company that the pace of change on the

governance front has been, in our view, too slow. However, the company has made

changes and publicly committed to further progress. With regards to the directors,

we set out our expectations on board composition and were satisfied to see the

company added a new director and maintained an open offer of settlement with the

activists. Overall we felt that while a degree of change was warranted, the company

was responsive to shareholder’s concerns. We supported the full management

slate going into the annual meeting; the meeting was subsequently postponed as

the company received an offer to be acquired.


We engaged a large provider of information technology and enterprise services

around the issue of external time commitments of its directors. We frequently

discuss this issue and seek to understand how both boards and the directors

themselves manage their various obligations. Our evaluation focuses on whether

these time commitments in any way weaken a director’s focus on board work rather

than the contribution or qualifications of the director. In this case, the lead

independent director engaged and addressed our concerns, elaborating on the

specific cases and how they are managed. We were satisfied with how the board

deals with these matters. While we will continue to closely follow this topic at this

company we chose to support all directors up for election at this meeting.

2

8

Voting Highlights and Statistics

The main themes for our

engagements related to voting this

quarter included M&A transactions,

contested meetings, and board

composition & refreshment.


Active Ownership and Responsible Leadership

In February, BlackRock’s CEO Larry Fink, sent a letter to 1300 company CEOs

globally to outline our views on how companies can shape the conversation in

relation to long-termism. As a fiduciary and significant shareholder in thousands of

companies, we believe we have a responsibility to represent our clients’ interests to

companies we invest in on their behalf and, in that way, to be good stewards of

their capital. We believe that good corporate governance – in terms of quality

leadership at board level and quality management by executives – is critical to the

long-term value creation by companies that our clients depend on to reach their

financial goals.

In the letter, we set out four key things that companies could do to encourage an

ecosystem consistent with long-term investment. Firstly, CEOs can lay out annually

their strategic framework for long-term value creation, and equally important,

explicitly affirm that their Boards reviewed those plans. Further, once these plans

are established, companies can move away from providing quarterly earnings

guidance, and can frame quarterly reporting as an “EKG” against long-term

“baselines”. They can also better report on, and explain how they are addressing,

the long-term risks, and opportunities, relating to the environmental, social and

governance (ESG) factors inherent in their businesses. Finally, CEOs can use their

voice to promote public policies that support long-term investment, including: tax

and other provisions consistent with longer investment holding periods and

increased public investment – and private financing – for the infrastructure needed

to sustain thriving economies.

Feedback on prior letters, which also promoted long-termism, as well as the early

responses to this year’s letter, suggest these messages resonate with corporate

leaders around the world. The most consistent feedback is that it is helpful to

companies to know they have the support of a long-term investor in taking

decisions that will have a payoff down the road but requires sacrifices in the near

term.

9

Thought Leadership



Members of Americas team spoke at a number of events over the past quarter, with

the objectives of furthering the public policy debate on matters deemed important to

investors and/or promoting an increased understanding of BlackRock’s approach to

corporate governance. We target events that enable us to connect with key

stakeholders and thought leaders, including corporate directors, senior members of

management teams, and other shareholders.

The following is a list of select speaking events from the quarter, and subject matter

covered:

REITWise: NAREIT's Law, Accounting & Finance Conference -

Washington, DC

We participated in a panel discussion to an audience of REIT executives. Topics

included proxy voting policies and processes, shareholder engagement, board

composition and diversity, and proxy access. We expressed our views on certain

REIT-specific governance issues, such as the governance flexibility provided to

REIT boards under the Maryland Unsolicited Takeover Act (MUTA) and our

expectations that boards use such flexibility in good faith or be held accountable by

shareholders. We also highlighted our expectations of companies’ to operate with a

long-term mindset and report near and mid-term results against a clearly articulated

long-term strategy.

Forum of Corporate Directors, Annual Governance Outlook - Orange

County

We presented to an audience predominantly of board directors based in Southern

California. We explained BlackRock’s perspective on board effectiveness, including

diversity and board evaluations, developments in executive compensation and how

we are integrating environmental social and governance (ESG) data more formally

into our investment processes and stewardship program.

Globe 2016, Sustainability & Innovation - Vancouver

The Globe 2016 conference was an international gathering of business leaders

focused on sustainability issues. We presented on the investor perspective on

sustainability and explained how BlackRock is encouraging enhanced reporting by

Speaking Events

The Corporate Governance and Responsible Investment team changed its name to

BlackRock Investment Stewardship, effective January 1, 2016. The team’s new

name better reflects the focus of the team’s work on protecting and enhancing the

long-term value of our clients’ investments through a range of engagement

activates. The Investment Stewardship team is focused on fulfilling BlackRock’s

responsibilities as a long-term investor on behalf of clients, principally through proxy

voting and engagement with companies on governance, environmental and social

factors material to their performance.


companies on the most relevant ESG factors in their business. We also explained

how we are integrating ESG data into our investment processes and stewardship

program and what that means for companies (see below).

2016 Shareholder Activism Conference, Simpson Thacher and Columbia

University - New York, NY

We conveyed our views on shareholder activism to an audience of issuers,

bankers, advisors, and investors. The panel discussion covered a range of topics

related to the current state of hedge fund activism. We provided our perspectives

on engagement with portfolio companies; our expectations of boards and

management teams to clearly articulate strategies, performance metrics, and

measurement timeframes; and our framework for how we evaluate activist

situations and vote at proxy contests.

Harvard Law School, Corporate Governance Roundtable - Boston

We participated in the semi-annual Harvard Law School Corporate Governance

Roundtable, a gathering of investors, corporates, advisors and academics. Many

topical issues were debated by the participants including proxy access, shareholder

proposals on environment-related disclosures, shareholder activism and

shareholder-director engagement.

Council of Institutional Investors, Spring Meeting - Washington, D.C.

We participated in a panel on the topic of “Broadening the Definition of Risk –

Environmental Factors”. We explained how BlackRock is integrating ESG data into

our investment processes and stewardship program and what that means for

companies. Similar to other presentations on this topic we highlighted how, over

the long-term investment horizons observed by our clients, many of those aspects

of running a business that have environmental and social impacts have financial

consequences. Hence, we take them into account in our assessment of how well

boards have protected shareholders’ interests and how well management have run

the company. We also discussed the need for a common framework for reporting

on these ESG factors such that the quality, consistency and comparability of the

data is improved over time.

International Federation of Accountants 2016 Chief Executives’ Forum

Exploring the Future - New York, NY

We presented to an audience of global accounting leaders on a panel entitled

“Investor and Corporate Governance Perspectives for the Profession”. Topics

included investor expectations of key players in the financial reporting chain, the

role of regulation and market participants in driving enhancements to corporate

reporting and disclosures, and potential future topics for collaboration between

investors and the audit profession, for example as relates to sustainability

accounting. We also discussed our perspectives on global stewardship codes, audit

committees’ use of audit quality indicators, and voluntary enhanced audit committee

reporting.


11


Market Developments and Trends

12

On February 12, 2016 the SEC responded to no-action requests from companies

seeking to omit shareholder proposals on proxy access due to existing substantial

implementation. The agency granted relief to 15 out of 18 issuers that have already

adopted “mainstream” access parameters consistent with the private ordering seen

with regards to this bylaw in the last year, namely “3/3/20/20” . The SEC still

granted the request in situations where a director being nominated through this

process was subject to closer scrutiny than those nominated otherwise. The three

cases where the relief was denied all sought to impose a higher ownership

threshold of 5% vs. the more commonplace level of 3%.

Congressional scrutiny of tax advantaged REIT spinoffs continues, with the latest

official action taking place on December 15th with the House of Representatives

voting to remove the practice. Companies that contacted the Internal Revenue

Service (IRS) prior to Dec. 7 will likely receive an exemption with the proposed spin-

off by Hilton Worldwide Holdings possibly being the last of such transactions.

Congress estimates the change could generate an additional $1.9 billion in tax

revenue in the future. The broader bill contained a number of other provisions that

Congress believes will foster more investment in the industry. Alternative means of

unlocking real estate value are already being explored with joint ventures and sale-

leaseback scenarios receiving attention.

U.S. Regulatory Developments

5

5Allowing a group of up to 20 shareholders who have held at least three percent of the outstanding

shares for at least three years to nominate up to 20 percent of the board’s directors.



On February 29th the Delaware Court of Chancery denied a motion to dismiss a

breach of fiduciary duty lawsuit against directors of Halt Medical in Calesa

Associates LP vs. American Capital finding that the definition of “control” is case-

specific and not predetermined at any particular level. In this situation American

Capital owned 26% of the shares of Halt Medical with the court finding that it had

control because three of the company’s six directors were appointed by American

with another having close ties to the firm. This resulted in controlling influence and

led to American allegedly being able to negotiate transaction terms that

disadvantaged other shareholders. The case raises important questions about the

independence, interests, and responsibilities of directors appointed by or

recommended by shareholders.

Governance topics of priority for forthcoming SEC review or proposals are reported

to include board diversity, climate disclosure, and clawbacks for executive

compensation. SEC Chair Mary Jo White has instructed staff to evaluate whether

greater disclosure should be required on how companies view gender or race when

considering board composition, an idea that builds on Rep. Carolyn Maloney’s

recent GAO report on the same topic. The SEC is assessing whether similar

disclosure on climate change risks would help investors make determinations about

the challenges facing companies and address calls by various investors urging

more transparency into the issue.

The volatility of the Chinese market coupled with the country’s 2016-2020 5-year

plan and its focus on innovation are sparking increased China-US M&A activity and

putting the spotlight on the importance of approval by the Committee on Foreign

Investment in the United States (“CFIUS”). An ever-present part of the US

regulatory environment, CFIUS has gained further prominence due to a number of

Chinese bids for US semiconductor companies. Congress has been increasing its

scrutiny of these deals partly due to political views on the various industrial

espionage allegations of recent years and partly due to national security and

intellectual property concerns given the key place that technology plays in both

areas. Hindering efforts to understand these bids is the fact that both Chinese

investments and the CFIUS process notoriously lack transparency, with investors

often unsure of the details of financing or risks of regulatory non-approval. Further

exacerbating these challenges is the structure of the semiconductor industry, which

often spans borders and, in particular, has a heavy production concentration in

Taiwan. Other industries are also affected – see, for example, the $2.8 billion

Philips-GO Scale Capital deal scuttled over CFIUS objections (undisclosed) and a

$43 billion proposed acquisition of the Swiss Syngenta by ChemChina likely facing

intense scrutiny over the former’s US chemical and R&D facilities.

Legislators in the Senate introduced the so-called “Brokaw Act” which would require

the SEC to make changes to its oversight of activist hedge funds. Notably, it would

shorten the 13D filing requirement from ten to two business days and require the

13


disclosure of short positions over 5% (with new rules on the definition of a group

and the use of derivatives). Legislators are concerned about what could be deemed

predatory activity in the space and the potential practice of tipping off investor

“allies” during the ten day period after the position is taken who can then unfairly

benefit once the stake is public. The rules around beneficial ownership disclosure

have implications that extend beyond the activist investment situations that have

been the primary focus of this discussion. From our perspective, it is important that

any changes to rules that have such a broad impact be made only after a

comprehensive review of how the current rules work, the implications of any

contemplated changes, and a conclusion that any changes would protect the

interests of shareholders. The bill faces major obstacles but with Bernie Sanders

and Elizabeth Warren as cosponsors is likely to garner media attention.

The Department of Labor released a new rule requiring disclosure of companies’

use of anti-unionization consultants. While the rule will only apply to agreements

made after July 1st it will involve naming all such relationships and the fees

involved. It will extend to all activities to discourage unionization or collective

bargaining, and require similar disclosure from entities providing advisory or other

services.


Following a lengthy process the Canadian Securities Administration (CSA)

published changes to the take-over bid and early warning regimes. Under the new

rules, which are now aligned across Canada, companies will have more time to

respond to bids. The change, which gives companies at least 105 days to review an

unsolicited bid, will have implications for the use of shareholder rights plans and

may add costs to a bidder’s hostile effort. Specifically, it is expected that given the

extended period there will be less appetite to allow the continuation of shareholder

rights plans past this evaluation period. Friendly bids will still be able to be

completed in the minimum 35 days.

Canadian Regulatory Developments

14


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those of their respective owners. CG-0063

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Documents

PowerPoint Presentation · ³ Basic engagement is generally a ... The company has a good understanding of the public criticisms ... targets corresponding to the strategic imperatives