Larry Fink letter
Well this isn’t
very helpful:
|
Delivering on the competing interests of a company’s many
divergent stakeholders is not easy. As a CEO, I know this
firsthand. In this polarized world, CEOs will invariably have one
set of stakeholders demanding that we do one thing, while another
set of stakeholders demand that we do just the opposite.
That is why
it is more important than ever that your company and its management be guided by
its purpose. If you stay true to your company’s purpose and focus on the long
term, while adapting to this new world around us, you will deliver durable
returns for shareholders and help realize the power of capitalism for all. |
Delivering on
the competing interests of a company’s many divergent stakeholders is
not easy. As a CEO, I know this firsthand. In this polarized world,
CEOs will invariably have one set of stakeholders demanding that we do
one thing, while another set of stakeholders demand that we do just
the opposite.
That is why
it is more important than ever that your company and its management be
guided by its purpose. If you stay true to your company’s purpose and
focus on the long term, while adapting to this new world around us,
you will deliver durable returns for shareholders and help realize the
power of capitalism for all.
I suppose if
you are the chief executive officer of a public company you will
sometimes find yourself in a situation where some of your stakeholders
demand that you do one thing while another set of stakeholders demand
that you do just the opposite. And you might say, well, one of our
important stakeholders — not the most important
probably, not up there with customers or employees, but certainly
important — is Larry Fink, who runs BlackRock Inc., which is among our
biggest shareholders, as it is for almost every public company. And so
you might call Larry Fink up and say “hey Larry I got some people who
want me to double down on producing thermal coal and I got some other
people who want me to get out of the thermal coal business, what do you think
I should do?” And Fink will be like … “stay true to your company’s
purpose and focus on the long term”? Okay? “Larry, I gotta be honest
with you, my company’s purpose is mining thermal coal, that’s just
what we do, but the long-term prospects for thermal coal are not so
hot; should I stick to our purpose, fulfill it, pay out some dividends
and disappear, or should I try to pivot into wind farms?” I feel like
Larry Fink has
a preference here! But he is just one stakeholder among
many.
Anyway here’s
Fink’s annual
letter to CEOs, which I quoted above. “The Power of
Capitalism” is the title? I don’t really know who the audience is
here? CEOs? I am not sure how actionable it is, for a CEO. The famous
problem of stakeholder capitalism, as Fink says, is that while it is relatively easy
to figure out what shareholders are supposed to want — stocks that go
up — it is much harder to figure out what all your stakeholders
want and how to prioritize them. If as a CEO you say “I work for the
shareholders and I do what I can to make the stock go up,” then you
pretty much know what you have to do. Memes, is the answer, it turns
out: What
you have to do is meme stuff. Crypto, electric vehicles,
non-fungible tokens, that sort of thing. I’m sorry! I don’t like it
either. But this is a question that is subject to empirical analysis.
Whereas if you work for the stakeholders then, you know, which
stakeholders and when? Your only guidepost is to “stay true to your
company’s focus,” which does not necessarily answer all of your
practical questions, though it probably will stop
you from messing around with NFTs.
Presumably
the audience is really BlackRock’s clients,
the people and institutions whose trillions of dollars of retirement
savings are managed by BlackRock. One model for Fink’s annual letter
is that he has cranked up the environmental, social and governance
stuff, in the letters and elsewhere, for the past few years, because
ESG is hot in the investment-management industry and talking about it
attracts clients. But there are vague rumblings
of a backlash, of clients and politicians worrying that
BlackRock is “too ‘woke,’” so he’s dialing it back like 10% in this
letter:
|
Stakeholder capitalism is not about politics. It is not a social
or ideological agenda. It is not “woke.” It is capitalism, driven
by mutually beneficial relationships between you and the
employees, customers, suppliers, and communities your company
relies on to prosper. This is the power of capitalism.
In
today’s globally interconnected world, a company must create value for and be
valued by its full range of stakeholders in order to deliver long-term value for
its shareholders. It is through effective stakeholder capitalism that
capital is efficiently allocated, companies achieve durable profitability, and
value is created and sustained over the long-term. Make no mistake, the fair
pursuit of profit is still what animates markets; and long-term profitability is
the measure by which markets will ultimately determine your company’s success. |
One way to
read that passage is “we would still like to manage money for
Republicans too.”
This is kind
of a boring letter? There is something odd about the world’s largest shareholder advocating
for stakeholder capitalism, saying to corporate CEOs “no, don’t
put shareholders first, prioritize your workers and
customers and communities above shareholder profits.” But of course
he’s not saying that. The point of this year’s letter is to dispel the
idea that he might be saying that. He’s saying that sometimes having
good customer service, paying employees enough to motivate them, and
not breaking the law can help maximize the long-term value of a
company’s cash flows to
shareholders,
and so companies should do those things. Their executives should run
the company, you know, well,
like a business. They should make good choices and not bad ones, so
that the business is valuable, for its shareholders, who are Fink’s
clients. There is nothing here that Milton
Friedman could possibly object to.
There are, in
the world, investors who specialize in finding companies that make
money but spend it wastefully on businesses with poor long-term
prospects, buy up shares in those companies and push them to cut that
spending and return cash to shareholders who can put it to better
uses. There are, in the world, investors who specialize in finding
companies that don’t make any money but that have bold and achievable
long-term dreams, buy up shares in those companies and give them
funding to turn those dreams into reality. There are investors who
specialize in some industry and try to pick which firms in that
industry will thrive in the long run and which will fail. BlackRock is
not one of those investors — or, rather, it does a bit of all of those
things, but as
a whole it
specializes in (1) finding all of the companies, (2) buying like 7% of
their stock and (3) holding it forever.1 And
then Fink writes an annual letter to all
of them at once.
How nuanced can that one letter be? “Try to do a good job” is pretty
broadly applicable advice, but beyond that situations will differ.
Even “try to manage your company for the long term” and “stay true to
your company’s purpose,” generic as they sound, can conflict with each
other.
Also here’s
this:
|
We see a growing interest among shareholders – including among our
own clients – in the corporate governance of public companies.
That is why
we are pursuing an initiative to use technology to give more of our clients the
option to have a say in how proxy votes are cast at companies their money is
invested in. We now offer this option to certain institutional clients,
including pension funds that support 60 million people. We are working to expand
that universe.
We are
committed to a future where every investor – even individual investors – can
have the option to participate in the proxy voting process if they choose.
We know
there are significant regulatory and logistical hurdles to achieving this today,
but we believe this could bring more democracy and more voices to capitalism.
Every investor deserves the right to be heard. We will continue to pursue
innovation and work with other market participants and regulators to help
advance this vision toward reality. |
One way to
put it is that right now Larry Fink gets to decide how trillions of
dollars’ worth of shares are voted at corporate meetings, and he is
volunteering to give up that power and hand it back to his clients
(eventually). Do you think a fully distributed BlackRock, one where
each client votes its own shares rather than delegating that power to
Larry Fink, would be as influential as the current actual BlackRock?
Would its letters get as much attention?
This column does
not necessarily reflect the opinion of the editorial board or
Bloomberg LP and its owners.
To contact the author of
this story:
Matt Levine at mlevine51@bloomberg.net
To contact the editor
responsible for this story:
Brooke Sample at bsample1@bloomberg.net
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