It's Hard for an Index-Fund Guy to Push Social Change
BlackRock’s Laurence Fink is at it again, posting his latest open letter to the nation’s chief executives on Tuesday full of ambitious-sounding ideas for improving corporate governance.
If you look at his letters chronologically, you can track how his thinking has evolved.
His first letter, written in January 2012, had a narrow focus. Fink wanted CEOs and board chairmen to know that when activists and companies locked horns, BlackRock, the giant investment management firm he has run for 30 years, would no longer pay attention to the recommendations of proxy advisory firms. Instead, BlackRock expected company executives to make their case directly to the firm.
“We listen carefully and respectfully to a company’s positions, and are willing to support unconventional approaches as long as they can be expected to serve the interests of long-term shareholders,” he wrote. Given that BlackRock had $3.8 trillion under management at the time, this was not a message corporate executives could afford to ignore.
In his next letter, which he wrote two years later, he asked a broader question: Why are so many companies focused on short-term results rather than long-term prosperity?
It concerns that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company's ability to generate sustainable long-term returns.
He strongly suggested that BlackRock — whose assets under management had increased to $4.7 trillion — would support companies that sacrificed short-term profits for investments that would pay off in later years.
After 2014, Fink’s letter became an annual event, almost as eagerly anticipated as the release of the Berkshire Hathaway annual report. In 2015, he urged companies to turn their backs on shareholder activists who were causing them to underinvest “in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.”
In 2016, he told CEOs that he wanted them to “communicate with shareholders their annual strategic frameworks for long-term value creation” so that shareholders (i.e. BlackRock) could evaluate them.
Last year, he dwelled on the downside of globalization — uneven wage growth, and technology eliminating “millions of jobs for lower-skilled workers even as it creates new opportunities for highly educated ones.”
Fink’s 2018 letter is entitled “A Sense of Purpose,” and as the title suggests, it is his most ambitious yet. There is almost nothing in it about proxy fights or the stock market. Instead, Fink is focused on larger societal concerns. “On issues ranging from retirement and infrastructure to automation and worker retraining,” he writes early in the letter, the government is failing the country. He continues:
As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.
He ends the letter with a plea for executives to adopt his view of the role of the corporation:
Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?
As regular readers know, my own thinking has also evolved 1 over the years, and I now believe that companies need to focus more on the long term, and that the kind of short-term financial engineering preferred by most shareholder activists is destructive to the U.S. economy. I also wish companies would do more in terms of worker training and apprenticeships, community involvement and diversity.
But I’m not the chief executive of an investment firm that holds, by now, a staggering $6.2 trillion under management. 2 I don’t have a responsibility to maximize returns for people who are counting on me for their retirement and their kids’ college educations. So while I applaud Fink’s willingness to raise these issues out loud, I’m left with an obvious question: How much can BlackRock do to push companies in the direction it wants them to go? The answer is: not much. 3
Because BlackRock traffics primarily in index funds, it can’t sell stocks of companies whose strategies it disapproves of. And it can’t load up on stocks of companies it either wants to support or wants to force change upon. So companies don’t really have to worry about Fink’s ability to force the kind of change he is pushing for.
In addition, if you look at BlackRock’s track record in recent years, you’ll discover that for all of Fink’s talk about supporting companies focused on the long term, the firm votes with activists a surprising amount — up to 40 percent of the time in some years. Last year, for instance, it sided with Nelson Peltz in his proxy battle with Procter & Gamble, and with Bill Ackman, who in November lost his bid to gain three board seats at ADP LLC, the human resources management company.
On the one hand, you can’t blame BlackRock for siding with activists who are pressuring managements to boost the price of their stock. Even index-fund investors want the best returns they can get. On the other hand, let’s face it: When you are siding with activists in a proxy fight, you are usually voting for short-term fixes over long-term value.
Finally, there is the question of what it really means to make the interests of society — and not just the bottom line — a priority. What would it look like if, say, auto companies kept plants open in the U.S. instead of moving them to Mexico? What if energy companies became so concerned about the environment that they shifted their focus from fracking to alternative energy sources like solar or wind? What if drug companies stopped trying to extend their monopolies on branded drugs and allowed low-cost generics on the market to help make lower-priced drugs available?
In each case, American workers and consumers would be better off, but the stocks of those companies would be crushed. I don’t have any big problems with that myself, since I think there are societal goods that outweigh a rising share price. But this would be terrible for BlackRock, and for all the people who have entrusted the firm with their money.
In his letters, Fink often notes that he has a responsibility to his investors, many of whom are not wealthy and are depending on BlackRock’s returns to get through retirement and other life events. It’s the conundrum of the modern age: People are so dependent on the market that they need stock prices to rise — even if it means they are hurt by higher drug prices and factories moving to Mexico.
Every year after his letter is published, Fink receives hosannas from those of us in the anti-short-termism camp. And I still think it’s good that he’s saying the things he’s saying. It’s just too bad that he’s not in a position to do more than talk.
To give you an idea of where my starting point was, the first business story I ever wrote, in 1982, was a heroic account of T. Boone Pickens' first big takeover attempt.
As of the end of 2017.
I asked BlackRock for an on-the-record interview with anyone at the firm who could speak to the issues raised by Fink's letter. I was turned down.
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Jonathan Landman at email@example.com