February 5, 2016
In our MORWM morning briefing we often discuss the obsession corporate America and the investing public has with short term results. In his 2016 letter to CEOs, Laurence Fink urges executives to disband from the short term earnings hysteria that plagues the financial markets, and focus on delivering to shareholders long-term growth strategies that position their companies for sustainable growth over the long haul.
Dear Clients and Friends,
Every morning at MOR Wealth Management, we begin the day with a comprehensive news brief. For many months we have discussed the obsession corporate America and the investing public has with short term results. This week I stumbled upon an article that I felt was so prevalent to the matter, I printed copies and left them on everyone’s desks. Now, I would like to share it with you.
This article presents a letter that Laurence Fink, the CEO of BlackRock (the world’s largest investor) sent to all of the S&P 500 companies’ CEOs this past Tuesday. In his letter, Mr. Fink urges executives to disband from the short term earnings hysteria that plagues the financial markets, and focus on delivering to shareholders the long-term growth strategies that position their companies for sustainable growth over the long haul. Mr. Fink further comments on many relevant issues that arise from short-sighted thinking. Below we have shared excerpts from Mr. Fink’s letter and have set in bold type several dramatic statements he makes. We hope this letter strikes a chord with all of the friends of MOR Wealth Management. Enjoy!
“Over the past several years, I have written to the CEOs of leading companies urging resistance to the powerful forces of short-termism afflicting corporate behavior. Reducing these pressures and working instead to invest in long-term growth remains an issue of paramount importance for BlackRock’s clients, most of whom are saving for retirement and other long-term goals, as well as for the entire global economy.
While we’ve heard strong support from corporate leaders for taking such a long-term view, many companies continue to engage in practices that may undermine their ability to invest for the future.”
“We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries, that support strategies for long-term growth.
We also believe that companies have an obligation to be open and transparent about their growth plans so that shareholders can evaluate them and companies’ progress in executing on those plans.
We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. Additionally, because boards have a critical role to play in strategic planning, we believe CEOs should explicitly affirm that their boards have reviewed those plans. BlackRock’s corporate governance team, in their engagement with companies, will be looking for this framework and board review.
Annual shareholder letters and other communications to shareholders are too often backwards-looking and don’t do enough to articulate management’s vision and plans for the future. This perspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent.”
“Given the right context, long-term shareholders will understand, and even expect, that you will need to pivot in response to the changing environments you are navigating. But one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses.
Without clearly articulated plans, companies risk losing the faith of long-term investors. Companies also expose themselves to the pressures of investors focused on maximizing near-term profit at the expense of long-term value. Indeed, some short-term investors (and analysts) offer more compelling visions for companies than the companies themselves, allowing these perspectives to fill the void and build support for potentially destabilizing actions.”
“With a better understanding of your long-term strategy, the process by which it is determined, and the external factors affecting your business, shareholders can put your annual financial results in the proper context.
Over time, as companies do a better job laying out their long-term growth frameworks, the need diminishes for quarterly EPS guidance, and we would urge companies to move away from providing it. Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need. To be clear, we do believe companies should still report quarterly results – “long-termism” should not be a substitute for transparency – but CEOs should be more focused in these reports on demonstrating progress against their strategic plans than a one-penny deviation from their EPS targets or analyst consensus estimates.
With clearly communicated and understood long-term plans in place, quarterly earnings reports would be transformed from an instrument of incessant short-termism into a building block of long-term behavior. They would serve as a useful “electrocardiogram” for companies, providing information on how companies are performing against the “baseline EKG” of their long-term plan for value creation.”
“Generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. These issues offer both risks and opportunities, but for too long, companies have not considered them core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord. Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts.
At companies where ESG issues are handled well, they are often a signal of operational excellence.”
“In Washington (and other capitals), long-term is often defined as simply the next election cycle, an attitude that is eroding the economic foundations of our country.
Public officials must adopt policies that will support long-term value creation. Companies, for their part, must recognize that while advocating for more infrastructure or comprehensive tax reform may not bear fruit in the next quarter or two, the absence of effective long-term policies in these areas undermines the economic ecosystem in which companies function – and with it, their chances for long-term growth.
We note two areas, in particular, where policymakers taking a longer-term perspective could help support the growth of companies and the entire economy:
• First, tax policy too often lacks proper incentives for long-term behavior. With capital gains, for example, one year shouldn’t qualify as a long-term holding period.”
“• Second, chronic underinvestment in infrastructure in the U.S. – from roads to sewers to the power grid – will not only cost businesses and consumers $1.8 trillion over the next five years, but clearly represents a threat to the ability of companies to grow.”
“Corporate leaders have historically been a source of optimism about the future of our economy. At a time when there is so much anxiety and uncertainty in the capital markets, in our political discourse and across our society more broadly, it is critical that investors in particular hear a forward-looking vision about your own company’s prospects and the public policy you need to achieve consistent, sustainable growth. The solutions to these challenges are in our hands, and I ask that you join me in helping to answer them.
Laurence D. Fink
”Market volatility continues to increase year after year, largely due to the media’s obsession with short term statistics. After all, market related television shows have to fill 10 hours of content every day! With the growing trend of “activist investing” in the financial markets, too often geared toward generating short term stock price increases at the expense of the long-term health of the company, I believe Mr. Fink’s letter teaches us an important lesson: Don’t get caught up in the media hype surrounding quarterly earnings results. Always remember to view the results through the lens of the long-term growth strategy of a company. Through that lens we put quarterly results in perspective. To those who wish to read Mr. Fink’s letter in its entirety, a link can be found HERE, and to all, I wish you a happy weekend!
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
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