Larry Fink’s 2020 letter to investors gives us more questions than answers

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Have you read Larry Fink’s 2019 Letter to CEOs? It’s encouraging. And yet…


I have a challenge for him.


First, the positives.


In 1994 Tomorrow’s Company, the think tank of which I was CEO for many years and now remain a trustee, first argued that purpose needed to be at the heart of a company’s strategy and values at the heart of behaviours. It offered a simple framework, which it called an inclusive approach, to focus company minds on purpose, values, relationships and their licence to operate.


In 2019 Fink says:


Every company needs a framework to navigate this difficult landscape, and that it must begin with a clear embodiment of your company’s purpose in your business model and corporate strategy.’


In 2008 Tomorrow’s Company published Tomorrow’s Owners. It argued that shareholders had four responsibilities, and that one of these was stewardship. It worked with BlackRock and other institutional investors to improve investor stewardship, culminating in the 2018 publication Better Stewardship – an agenda for concerted action in which the following words could be found:


There is a troubling disconnect between our system of wealth creation, and the society which it serves. The symptoms include public anger about corporate failure and excessive executive pay; the continuing impacts on living standards from the global financial crisis; low investment; poor returns for savers, pressure on pensions, and high levels of debt, especially for graduates. Public trust in the whole system – including governments, universities and the media, not just business and investment – is low.The wellbeing of savers and investors can only be promoted if the underlying performance of investee companies is improved. Competition between asset managers on relative performance is ultimately a zero-sum game. This is where stewardship comes in. Stewardship is the golden thread that can connect, and guide the actions of, all those who play their part in the flow of money from the savings of citizens through wealth creation and back to those citizens.


In 2019 Fink says:


As we enter 2019, commitment to a long-term approach is more important than ever – the global landscape is increasingly fragile and, as a result, susceptible to short-term behaviour by corporations and governments alike… Around the world, frustration with years of stagnant wages, the effect of technology on jobs, and uncertainty about the future have fueled popular
anger, nationalism, and xenophobia. In response, some of the world’s leading democracies have descended into wrenching political dysfunction, which has exacerbated, rather than quelled, this public frustration. Trust in multilateralism and official institutions is crumbling. Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues…


In 2018 Tomorrow’s Company worked in collaboration with Danone and published The Courage of their Convictions saying:


A firm and enduring purpose beyond profit is, more than ever, the precondition for true agility in an age of uncertainty. Companies live or die by their relationships. The strength of those relationships is shaped by the decisions that leaders take about purpose and values. Companies with a purpose beyond profit enjoy four potential advantages in the face of change and uncertainty. First, their purpose and values become a source of energy and commitment in workplace relationships enabling them to attract and retain talent and engage and develop their own people better. Secondly, a clear purpose which people can naturally identify as a keel, gives stability and resilience. Strong values provide a clear basis for building trust. Thirdly, the benefits in terms of trust yield a reputational return, enhancing brands and accumulating external trust and goodwill. The licence to operate is enhanced. Fourth, as a result of the first three benefits there is a more compelling case to take to those investors who are interested in long-term performance. This in turn provides a basis for building greater investor confidence which is in turn a further source of stability.


In 2019 Fink writes:


Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.


If you had told me that the Tomorrow’s Company agenda would be so completely adopted by the world’s leading investor I would have been disbelieving and delighted. However.Is Larry Fink as a CEO taking the advice of Larry Fink as an investor?


Purpose-driven companies review lines of business and ask how well they fit with its purpose and values.


Does the business model reflect the purpose? Admittedly BlackRock’s business model leans heavily towards passive investment. Nonetheless I haven’t come across many fund managers in BlackRock outside the stewardship team who appear to be moving towards a more long-term approach. If you Google BlackRock and short-selling you soon find stories about the companies BlackRock are hoping will do badly. ‘Is BlackRock better than competitors at retaining talent on the basis of its purpose? In my experience most, active fund managers are still locked in to the cycle of competing with each other for annual outperformance so they rank high in the league tables. Their own careers, and returns to their shareholders, appear higher on the agenda than the long-term health of the wealth creating companies they are invested in.


So, Larry, here is the real test. You tell us that as an investor:


BlackRock’s Investment Stewardship engagement priorities for 2019 are: governance, including your company’s approach to board diversity; corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management. These priorities reflect our commitment to engaging around issues that influence a company’s prospects not over the next quarter, but over the long horizons that our clients are planning for.


Which investment products have you dropped because they do not reflect a focus on the long horizons that your clients are planning for? Have you examined the impact of short selling on the behaviour and long termism of the companies in which you invest? Have you significantly changed the basis of your people’s remuneration away from yearly targets and bonuses? How do you reconcile the short-termism of many of your funds with your stated belief in your 2019 letter that a focus on the long term is essential if companies are to serve society as well as their shareholders?


Last year when I was discussing Fink’s 2018 letter with a group of CEOs and investors, one of them said,


‘Great letter. I wish he would send it to his own fund managers’.


So, Larry, answering those challenges effectively would make your 2020 Letter to CEOs even more persuasive.