Fine words from a CEO add up to nothing
BlackRock’s investment priorities will run counter to what its chief tells others
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?”
My own thinking has also evolved 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 US 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. I don’t have a responsibility to maximise 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. 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 per cent 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 boards 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 Bill Ackman in a proxy fight, you are voting for short-term fixes over long-term value.
Society’s interests
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 US 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.