"...shared economic security can only be achieved through a long-term approach by investors, companies and policymakers." -Laurence Fink
Dear Clients and Friends,
Last year around this time, we shared Laurence Fink’s annual letter to the CEOs of all S&P 500 companies. Larry Fink is the CEO of BlackRock, the largest investment firm in the world, with just over 5 trillion dollars in assets under management. Given the type of company Mr. Fink presides over, one may be surprised by what he writes in these annual letters. Last year, Mr. Fink urged companies to shy away from the infliction of short-term earnings hysteria and the pitfalls of focusing on quarter-to-quarter results. Mr. Fink instead encourages long-term, sustainable business planning which delivers disciplined value to shareholders via steady stock growth rather than short term stock pops. This, by the way, is the type of growth we need for our clients seeking to build wealth for long term goals such as retirement, college planning, etc.
For this weekend’s reading, we’ll take a look at Mr. Fink’s 2017 letter, which provides updates on the effects of last year’s letter on the investment landscape, as well as Mr. Fink’s wishes for S&P 500 companies going forward. With that said, please see Mr. Fink’s letter below, with ideas that we believe are of heightened importance highlighted.
“Each year, I write to the CEOs of leading companies in which our clients are shareholders. These clients, the vast majority of whom are investing for long-term goals like retirement or a child’s education, are the true owners of these companies. As a fiduciary, I write on their behalf to advocate governance practices that BlackRock believes will maximize long-term value creation for their investments.
Last year, we asked CEOs to communicate to shareholders their annual strategic frameworks for long-term value creation and explicitly affirm that their boards have reviewed those plans. Many companies responded by publicly disclosing detailed plans, including robust processes for board involvement. These plans provided shareholders with an opportunity to evaluate a company’s long-term strategy and the progress made in executing on it.
Over the past 12 months, many of the assumptions on which those plans were based –including sustained low inflation and an expectation for continued globalization – have been upended. Brexit is reshaping Europe; upheaval in the Middle East is having global consequences; the U.S. is anticipating reflation, rising rates, and renewed growth; and President Trump’s fiscal, tax and trade policies will further impact the economic landscape.
At the root of many of these changes is a growing backlash against the impact globalization and technological change are having on many workers and communities. I remain a firm believer that the overall benefits of globalization have been significant, and that global companies play a leading role in driving growth and prosperity for all. However, there is little doubt that globalization’s benefits have been shared unequally, disproportionately benefitting more highly skilled workers, especially those in urban areas.
On top of uneven wage growth, technology is transforming the labor market, eliminating millions of jobs for lower-skilled workers even as it creates new opportunities for highly educated ones. Workers whose roles are being lost to technological change are typically facing retirement with inadequate savings, in part because the burden for retirement savings increasingly has shifted from employers to employees.
These dynamics have far-reaching political and economic ramifications, which impact virtually every global company. We believe that it is imperative that companies understand these changes and adapt their strategies as necessary – not just following a year like 2016, but as part of a constant process of understanding the landscape in which you operate.
As BlackRock engages with your company this year, we will be looking to see how your strategic framework reflects and recognizes the impact of the past year’s changes in the global environment. How have these changes impacted your strategy and how do you plan to pivot, if necessary, in light of the new world in which you are operating?...
…As we seek to build long-term value for our clients through engagement, our aim is not to micromanage a company’s operations. Instead, our primary focus is to ensure board accountability for creating long-term value…
…Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates. A global company needs to be local in every single one of its markets.
BlackRock also engages to understand a company’s priorities for investing for long-term growth, such as research, technology and, critically, employee development and long-term financial well-being. The events of the past year have only reinforced how critical the well-being of a company’s employees is to its long-term success.
Companies have begun to devote greater attention to these issues of long-term sustainability, but despite increased rhetorical commitment, they have continued to engage in buybacks at a furious pace…
…Of course, the private sector alone is not capable of shifting the tide of short-termism afflicting our society. We need government policy that supports these goals – including tax reform, infrastructure investment and strengthening retirement systems.
As the U.S. begins to consider tax reform this year, it should seize the opportunity to build a capital gains regime that truly rewards long-term investments over short-term holdings. One year is far too short to be considered a long-term holding period. Instead, gains should receive long-term treatment only after three years, and we should adopt a decreasing tax rate for each year of ownership beyond that.
President Trump has indicated an interest in infrastructure investment, which has the dual benefits of improving overall productivity and creating jobs, especially for workers displaced by technology. However, while infrastructure investing can stem the flow of job losses due to automation, it is not a solution to that problem. America’s largest companies, many of whom are struggling with a skills gap in filling technical positions, must improve their capacity for internal training and education to compete for talent in today’s economy and fulfill their responsibilities to their employees. In order to fully reap the benefits of a changing economy – and sustain growth over the long-term – businesses will need to increase the earnings potential of the workers who drive returns, helping the employee who once operated a machine learn to program it.
Another essential ingredient will be improving employees’ understanding of how to prepare for retirement. As stewards of their employees’ retirement plans, companies must embrace the responsibility to build financial literacy in their workforce, especially because employees have assumed greater responsibility through the shift from traditional pensions to defined-contribution plans... Now is the time to empower savers with new technologies and the education they need to make smart financial decisions. If we are going to solve the retirement crisis – and help workers adjust to a globalized world – businesses need to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security.
That shared economic security can only be achieved through a long-term approach by investors, companies and policymakers. As you build your strategy, it is essential that you consider the underlying dynamics that drive change around the world. The success of your company and global growth depend on it.
Sincerely,
As we can see, Mr. Fink believes that companies have not only begun to adapt annual strategic frameworks for long-term value creation, but also disclosed these plans to shareholders in their annual reports. Now, we would like to see how companies adapt those frameworks to the rapidly changing economic and political environment around the world. Furthermore, Mr. Fink calls upon companies to shoulder more of the burden in setting up their employees for a life of success during their working years and into retirement. It will be interesting to see how successfully companies respond to this year’s requests. We’ll be back next Spring with an update! For those who wish to read Mr. Fink’s letter in its entirety, you can find it HERE.
Sincerely,
Dan
Daniel Levinson Financial Planning Associate
MOR Wealth Management, LLC
1801 Market Street, Suite 2435 Philadelphia, PA 19103 P: 267.930.8303 | c: 856-906-4888 | f: 267.284.4847 | daniel.levinson@morwm.com | www.morwm.com
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