Larry Fink Talks the Talk But Neglects the Walk
In 2014, BlackRock Inc. CEO Larry Fink, in his first missive to top CEOs, implored business leaders to think long term. Specifically, he called on them to stop using so much cash on stock-boosting buybacks and invest in growth instead. Four years later, stock buybacks are expected to have neared $520 billion in 2017. Yes, that's down about 6 percent from 2014, but it's still four times what they were two decades ago. At the same time, spending on capital expenditures has barely budged. What's more, pretty much everyone expects buybacks to soar this year, fueled by a massive tax cut.
It's not clear Fink has done much to back up that 2014 letter. The biggest buyer of its own stock is Apple Inc., which is on track to spend about $235 billion since 2012. The second-biggest investor in Apple, behind Vanguard, is BlackRock, which through its funds holds just more than 6 percent of the iPhone maker's stock. Fink seems to be in a good position, better than pretty much anyone else, to tell Apple to quit, or at least limit the buybacks. And yet there is no record he has. And Apple certainly hasn't curbed its stock buybacks.
Of course, his failure on buybacks has not stopped Fink from continuing to write full-throated annual letters telling CEOs what they must do or risk losing BlackRock's support. Fink's letters are timed each year to come out around Davos, the ultimate CEO lip service confab. It's likely not a coincidence. In this year's version of long-term thinking, Fink tells companies that it's time to put social purpose on par with producing profits. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Fink writes.
It's a nice sentiment that seems logical if difficult to measure; I guess you know it when you see it. It's also not completely new. In last year's letter, Fink told CEOs to be mindful of changes in the environment. But it's not clear why BlackRock would do any better at pushing companies to act socially responsible than it was at curtailing buybacks. If anything, buybacks and financial engineering in general should be in Fink and BlackRock's wheelhouse.
Still, Fink can claim some success on the social issue front. Last year, BlackRock persuaded Exxon to start disclosing an environmental impact report. Of course, getting Exxon to admit it contributes to climate change is the socially responsible activist equivalent of shooting fish in a barrel. And disclosure is a lot different than getting Exxon to do anything about it. Where's the long-term investment in alternatives?
Part of the answer is that Fink's bark is always going to be louder than his bite. BlackRock does nearly all of its stock market investing through index funds. So no matter how much it disapproves of a company's stance on the environment or whatever, it can't actually sell. Norway's giant wealth fund said recently that it would no longer invest in a number of companies because they either contributed to nuclear proliferation, were responsible for severe environmental damage or were a systematic violator of human rights. Again, BlackRock couldn't do the same without significantly changing its business, but Fink could still do more. Last year, BlackRock and other large investors got index providers like Standard & Poor's to bar companies with dual-share classes. If Fink is serious about social responsibility, why not at the very least push S&P to require companies, like Exxon, to disclose their social impact?
By far, Fink and BlackRock's largest stick has to do with CEO pay. Yet, according to the last report from As You Sow, which tracks shareholder rights issues for labor groups, it rarely whacks companies and executives with it. BlackRock has voted its shares 99 percent in support of CEO pay packages of the companies in the S&P 500. Certainly, there are more than five companies in the S&P 500 that Fink thinks are not putting enough emphasis on social justice, or else why make that the theme of this year's letter.
My guess is that Fink's letter may have more to do with the image of index funds and BlackRock than promoting social issues. Index funds have drawn criticism recently for standing by while companies, like airlines, raise prices and executive salaries, contributing to America's wealth gap and general economic sluggishness. Fink's letter makes it look as if BlackRock is doing something about the negative effects of index funds while perhaps deflecting criticism of BlackRock's recent enormous growth.
In the end, Fink's letters imploring companies to think more about the long-term health of the economy can't hurt, though if BlackRock doesn't actually back it up with action, it's hard to see how much it can actually help.
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Daniel Niemi at email@example.com