BlackRock Capital: Proxy Filed
BACKGROUND: Shareholders of mid-sized Business Development Company BlackRock Capital Investment Corporation (BKCC) will be receiving the Annual Proxy and asked to vote on two routine proposals: i) (re)-elect two “independent” directors to the Board; ii) ratify the selection of Deloitte Touche as the BDC’s “independent registered accounting firm” for 2017. The BDC Reporter-which promises News, Views And Analysis-is offering up its opinion to BKCC’s shareholders after a review of the Proxy materials. (We try to read every Proxy for every public BDC every year despite-as what follows will illustrate-it’s mostly a pointless and costly exercise).
We have no strong view about the selection of Deloitte & Touche. It’s one of those items in every Proxy where shareholders have no real ability to evaluate, and just tick the box.
If it’s any comfort, Deloitte charged a little less in 2016 than in 2015 (see page 20-21). Apparently in 2015 tax issues resulted in higher than normal billings.
No estimate is provided for this year.
There has been no controversy that we can identify about any accounting or tax issue at the BDC.
Our view: Deloitte is as good as any other name out there.
There has been a great deal of churn in the ranks of the BDC’s Directors in recent weeks.
Three different individuals will no longer be involved, as the Proxy summarizes:
On July 25, 2016, Brian D. Finn notified the Company that he would resign as a Director of the Company effective immediately. Mr. Finn’s decision was not a result of any disagreement with the Company. On December 22, 2016, Steven Sterling announced that he would be stepping down as Chairman of the Board and Chief Executive Officer of the Company, effective as of December 31, 2016. Mr. Sterling will continue to provide services to the Company pursuant to a consulting services agreement with BlackRock, Inc. (together with certain of its affiliates, collectively “BlackRock”). The consulting services agreement expires June 30, 2017, unless terminated earlier by either party. Mr. Sterling also continues to serve as a Director of the Company until the Annual Meeting and is not standing for re-election. Mr. Sterling’s decision was not the result of any disagreement with the Company.
On January 30, 2017, François de Saint Phalle announced that he will be retiring from the Board, effective as of the conclusion of the Annual Meeting. Mr. de Saint Phalle’s decision was not the result of any disagreement with the Company.
However, none of that directly impacts what shareholders are being asked to vote on: the re-election of just 2 Directors who’ve been active at the BDC since 2005 and 2013 respectively.
Why only 2 Directors when BKCC has an 8 person Board ?
That’s because the BDC has a “staggered Board”, with only a few individuals being voted upon in any year.
Various reasons may be given by the BDC for “staggering” these elections. However, let’s call a spade a spade and accept that this is one of the many ways the external firm that effectively controls the BDC (in this case the world famous asset manager BlackRock) stays in charge.
IN THEIR OWN (CAREFULLY CHOSEN) WORDS
Just in case any reader thinks we’re being unfair we’ll quote from the Risk Factors of the latest 10-K where the BDC spells things out as clearly as one can expect under the circumstances:
Certain provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
The Delaware General Corporation Law, our amended certificate of incorporation and our amended and restated bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price of our common stock. We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our amended certificate of incorporation and amended and restated bylaws dividing our Board of Directors in three classes serving staggered three-year terms, requiring the affirmative vote of the holders of 75% of the then outstanding shares of our capital stock entitled to vote to remove a director for cause, and, subject to the rights of any holders of preferred stock, filling any vacancy on our Board of Directors only by a vote of a majority of the directors then in office. The classification of our Board of Directors and the limitations on removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from acquiring us. Our certificate of incorporation and bylaws also provide that special meetings of the stockholders may only be called by our Board of Directors, Chairman, Chief Executive Officer or Secretary. These provisions, as well as other provisions of our amended certificate of incorporation and our amended and restated bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.
Setting aside that issue, the two individuals involved: John Barron and Jerold Harris have stellar resumes which should continue to inform their contribution to BKCC ‘s Board. Please see pages 6 and 7 of the Proxy.
SPEAKING UP ?
However, if shareholders are expecting much in way of an independent voice from these directors or any of the other 3 non-BlackRock affiliated members on the Board, they may be disappointed.
Like many BDCs, BlackRock keeps its public BDC under tight control.
ALL IN THE FAMILY
Here’s a case in point, also drawn from the Proxy.
As is so often the case, the Chairman of the Board is the CEO of the Investment Adviser and a BlackRock senior manager: James Keenan (see page 11).
In fact, the Proxy explicitly sets out BlackRock’s argument for why the person most responsible for the management of the BDC should also be appointed to be its Overseer In Chief:
..Our Directors have been divided into two groups—interested Directors and Independent Directors. Interested Directors are interested persons as defined in the 1940 Act. The Board’s Chairman, James Keenan, is an interested Director because he is a Managing Director of BlackRock, Global Head of Fundamental Credit as well as a member of BlackRock’s Global Operating Committee and the BlackRock Alternative Investment Executive Committee. In part because the Company is an externally-managed investment company, the Board believes having an interested chairperson that is familiar with the Company’s portfolio companies, its day-to-day management and the operations of its Advisor enhances, among other things, the Board’s understanding of the Company’s investment portfolio, business, finances and risk management efforts. In addition, the Board believes that Mr. Keenan’s employment with the Advisor better allows for the efficient mobilization of the Advisor’s resources at the Board’s behest and on its behalf…
OUR UNALLOYED VIEW
The BDC Reporter has heard it all before from essentially every public BDC, and we still do not agree, even if we have no illusion that this will change.
To state what seems obvious to us and, using the farmer’s analogy that we city folk are familiar with, you cannot have the fox guarding the hen house, however experienced, well meaning and honorable that fox might be.
There are just too many conflicts of interest for the BDC Reporter to be convinced that shareholder interests will be adequately represented.
Again, we refer our readers who’ve gotten this far to pages 30-31 of the 10-K for an enumeration by the BDC of just some of those conflicts.
Nor can the BDC Reporter say with any confidence that the record shows that the existing “independent” Board members (those being re-elected and the 3 others) have done much to deal with some of the recent challenges facing the Company.
As BKCC’s shareholders know in the past two years, BlackRock (through a subsidiary) has taken control of the Investment Advisor and both fundamental and stock performance have performed very poorly.
The NAV Per Share in the past 2 years has dropped from $10.49 to $8.21.
The stock price that was at a high $10.73 in 2013 is now at $7.28, and has been even lower.
The distribution has been cut.
The Chairman/CEO brought in initially has resigned/been replaced only a short time after taking up the role (s).
The strategy of the BDC has been substantially altered, with far greater reliance going forward on investing in off balance sheet vehicles.
Moreover, the Company-not the Advisor-absorbed a huge legal settlement expense that a truly “independent” Board might have argued should have been partly or fully paid by the Investment Advisor.
Even when the Investment Advisor temporarily offered to waive its Incentive Fee, the impetus appears to have come from BlackRock rather than due to push back from the “independent” Board members.
(If we’re wrong on this subject, we’re happy to be corrected but the Conference Call transcript suggests the impetus came from BlackRock.
Even that concession to shareholders may be less generous than one might think. When we reviewed BKCC’s 2017 outlook, the prospect of much in the way of incentive fees seemed remote, but a subject for another time).
SKIN NOT IN THE GAME
Furthermore, the Proxy makes clear that the officers and directors have only a very modest stake in the BDC that they are entrusted with managing.
See page 26 of the Proxy, deduct out the shares owned by the departing directors, and you’ll see only a very modest 0.75% of BKCC’s total shares are held by the nine principals involved (including 2 with no shareholding at all !).
Nor-as far as we can tell from reading the 10-K (see page F-31) does the Investment Advisor own ANY shares of BKCC.
Other related BlackRock entities (still quoting from the trusty 10-K) owned 490,000 shares at the end of 2016, down from 3,383,000 two years before.
The 490,000 shares owned (we don’t know if they’re counting the officers and directors shares) has a value of about $3.5mn.
WHY ASSET MANAGEMENT IS A GREAT BUSINESS
By contrast, BlackRock-through its Investment Advisor-has garnered $45mn in Management Fees in just the past two years.
The Directors-as a group-have received more than $600,000 a year in total compensation.
Is that an “alignment of interests” between shareholders on one side and the Board, and Investment Advisor and its officers on the other ?
We will let our readers decide for themselves what they think, but the BDC Reporter is not convinced.
Nor is the existence of two Committees (Audit and Governance-see page 11) run by “independent” directors any material consolation.
Like many other BDCs (including internally managed ones by the way), BKCC is going through the motions with this Proxy (all paid for-ironically enough-by the shareholders).
There is no real choice to be made here, and the information in the Proxy and the 10-K (which are supposed to be read together) only underscores the divergence of interests between the Investment Advisor, its officers and directors (whether nominally “independent” or not) and its shareholders.
Voting against one or both the proposals in protest is unlikely to achieve much as most institutional and retail shareholders are going to vote the party line whatever their private reservations.
We suggest that if you have anything to say and have time to write a letter (emails are so 21st century) , the Proxy does offer up a form of interaction with the Board:
Stockholders and other interested parties may communicate with the Board or any member of the Board by mail addressed to the Board or the Director(s) with whom they wish to communicate by either name or title. All such correspondence should be sent c/o Secretary of the Company at 40 East 52nd Street, New York, New York 10022.
After all, remember the oft-repeated quote from Margaret Meade:
Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.