Larry Fink is in an odd spot. He runs BlackRock Inc., the world’s biggest money manager. His New York-based company oversees assets greater than 20 times those of the mammoth Canada Pension Plan Investment Board. He should have more influence than just about anybody over how companies behave.
Yet he lacks the big stick that other fund managers have when they talk to chief executive officers. He can’t threaten to sell shares of a company when he doesn’t like its strategy.
Most of the more than $4-trillion (U.S.) that BlackRock oversees on behalf of clients is in index funds that passively track market benchmarks. Because it can’t sell individual stocks in index funds, BlackRock is, by necessity, in it for the long haul.
So instead of threatening, Mr. Fink cajoles. He writes letters. Very, very well-read letters. His latest went to the heads of all the biggest companies in the United States and Europe, hundreds of them, urging CEOs to think long term.
“As the largest index player in the world, we have to own companies, even if we hate ‘em,” Mr. Fink said in an interview on a recent visit to Toronto. “The most powerful component of our ownership is our vote, and we have to vote for what we think is in the best interests for the long term. Whether we like you or not, we are going to be an investor for the long term. We want leadership to focus on long-term strategies.”
In many ways, BlackRock’s fortunes are tied to long-run economic growth. That’s what drives stock indexes higher. It’s a rising-tide-lifts-all-boats game.
At the moment, stocks are doing just fine, with U.S. indexes such as the Standard & Poor’s 500 rising to records. Yet Mr. Fink sees problems. To his way of thinking, executives are overly preoccupied with producing near-term returns to keep impatient investors happy. Longer-term projects – from researching a new molecule that could one day be a wonder drug to building factories with payoffs that might be measured in decades – are not getting their due.
Mr. Fink is worried that the great tide of economic growth is not rising as quickly as it could be because of persistent and pernicious short-term thinking. Everyone from Main Street to Wall Street to Pennsylvania Avenue is too focused on near-term waves to pay attention to what the overall water level is doing.
Blogs, polls, the story of the moment – that is what drives peoples’ thinking, he says. That means investment decisions and political moves are based on what’s happening now, and not long-term goals. The economy will bear the cost of this short-term obsession, and so will investors, Mr. Fink warns. He would like to see big changes in everything from accounting to corporate governance to government spending priorities, to reset the focus on more distant horizons.
Notwithstanding the index-investing bind, Mr. Fink has clout. Find a list of the world’s most powerful people, and he is likely to be on it.
He knows it, and uses his position. His latest missive urges bosses to think much further ahead. His message is that businesses should build more factories, spend more on research, worry less about buying back stock or paying dividends to placate short-term investors and activist shareholders. That will create jobs, and exciting new products, and drive long-term returns and economic growth.
“We need executives in business to start focusing on what is right in the long run,” he said.
It’s not just chief executive officers. Mr. Fink is exasperated by investors who are too easily spooked by transitory events and sell their shares, forgetting that they were purchased to fund some far-off goal like retirement. And he’s not pleased with the news media for its second-by-second obsession with what each tiny event means for investments.
“Societies are having a hard time, politically and economically, adjusting to the immediacy of information: The 24/7 news cycle, blogs, the instantaneous information. It’s very hard. This is one of the things where we are developing a crisis.”
‘Way too much cash’
Instead of investing for 40 years, too many people put their money in bonds or cash, fearing a selloff, Mr. Fink says. By doing so, investors lock themselves into low returns that can jeopardize a comfortable retirement. The risk grows as more and more people assume responsibility for their own retirement funds, because of a shift from professionally managed defined-benefit pension plans, which pay a set monthly amount for life, to defined-contribution plans that require individuals to pick their own funds and bear the investing risk.
“The individual investor is probably more in a position where [his or her] pension plan is probably going to be more at risk because of fear-mongering, and the short-termism has produced portfolio allocations that are way too short to meet their long-term liability needs in retirement. So they are sitting on way too much cash, way too much bonds.”
Mr. Fink’s watchword is outcomes. Remember what you’re saving for, and focus on that goal. Ignore the ripples. Think about where the water level will be decades from now.
Ask Mr. Fink what he thinks of the latest market-roiling crisis in some faraway nation and you will draw scorn. Forty years from now, an investor looking at a chart of the world’s stock markets won’t be able to pick out the crisis in Cyprus or Ukraine.
“Who cares? It doesn’t matter,” he says, his voice rising. “If you have a 30– or 40-year liability, it doesn’t matter what’s going on.”
But the media make it matter, by focusing on the news of the moment and the trade of the moment. Mr. Fink is particularly frustrated with the lionization of activist investors in the media. Think Bill Ackman, Carl Icahn and others who push for changes that will lead to an immediate runup in the stock price, though Mr. Fink didn’t name names. His letter to CEOs was not about activism specifically – but there is certainly a subtext to be found.
“The media made this into an activist letter. There was never even a word in the letter about activism. It was about focus on the long run.”
Still, activism bothers him. Not all of it, as sometimes what activists are demanding is the right strategy. But it’s clear that Mr. Fink does not see activists who show up demanding that a company increase debt to pay a dividend, or pursue other strategies to goose immediate stock returns, as always fighting the right battle.
“I am saddened in some respects to see how many CEOs are totally frightened of the activist investor,” he said. “What is disturbing to me, when you read and watch the news media, and the business media, they empower the activists. I guess it’s good talk. But is it good for society? Is it good for jobs?”
Similarly, he is critical of accounting rules that push insurance companies to invest in shorter-term assets, rather than long-term projects such as infrastructure. “Everything is leading toward an underinvestment in infrastructure and an underinvestment in capital expenditures.”
One factor behind this underinvestment may be that CEOs don’t stick around long enough.
“The average CEO in the U.S. has a term less than five years. So how long does it take for a capital expenditure to turn into profits? Think about pharmaceutical companies for a moment. It may take 15 years for a molecule to be created, to be proved, and then be marketed. So it takes some boldness of leadership to be focused on these long-term horizons, especially when their terms are so short.”
Mr. Fink, by contrast, is approaching three decades on the job. Now 61, he has run BlackRock since its beginnings as a bond business inside Blackstone Group in 1988. Blackstone sold its stake in the business to a bank, PNC Financial, after a falling out with Mr. Fink over strategy. Blackstone Group founder Stephen Schwarzman has said since that selling BlackRock was a “heroic mistake.”
In 1999, the company went public. It has grown incredibly fast ever since. It manages money for everyone from retail investors to pension plans. During the financial crisis, the U.S. Treasury hired BlackRock to run assets in the Troubled Asset Relief Program, and the Bank of Greece hired the company to help fix the country’s banking system.
Mr. Fink believes Washington suffers from the same myopia that afflicts business. Politicians are so focused on re-election, there is no time to govern and no incentive to plan beyond the next vote.
“The U.S. economy is going to grow 2.5 to 3 per cent [a year]. If we had a strong Washington that is focused on long-term opportunities for the United States, we’d be growing at 5 per cent right now.”
He remains positive about the United States and American companies. But he thinks things could be a lot better. “I’m optimistic, but you have to be an outspoken person about the issues that need change.”
‘It’s not sexy’
Excellent. Superb.” That’s how Mr. Fink characterizes the reaction he has had from CEOs to his plea for long-term thinking. He has a binder full of about 80 responses, outlining their long-term plans.
That’s in private. So why are more CEOs not speaking up publicly?
“It’s not about the moment. In the media, it’s about the moment. And what I’m talking about is to stop talking about the moment.”
Will he keep pushing? Probably. It’s been a long-term project for him. But at some point, others have to speak up about the issue, even if it doesn’t capture big headlines.
“It’s not sexy. That’s your fault. I’m not going to repeat myself, I have to run a company.”
THE QUOTABLE LARRY FINK:
On why having strong pensions has been a boon for Canada’s economy:
“If you have confidence in your retirement, then you can consume more too. … In Canada, you have some [pension] plans that have done very well and … I think one of the fundamental reasons why Canada has fared better than the United States …[is] there is such a larger component of the Canadian population that, as they near retirement, they don’t have the stresses of having enough money for retirement, because your retirement plans are far stronger than some of the U.S. retirement plans.”
On mandatory pension plans, such as the proposed Ontario pension scheme:
“I am a big fan of mandatory savings plans. I’ve been saying that in the United States. I love what they did in Australia. You turn 16, you get a card. Even if you are working part-time, you are building up a pension plan. … In Australia, when they go into retirement, they are going to have far better certainty. It’s that certainty that allows people to say, ‘You know what, that car is nine years old, it’s time to buy a new car. … I need a new dishwasher, I want to buy a new dress,’ whatever. I have more certainty.”