Why Larry Fink isn't waiting on Washington
"Without a sense of purpose, no company, either public or private, can achieve its full potential."
With these words, Blackrock CEO Larry Fink this week pushed further open the door to a new era of capitalism in his annual letter to CEOs. That new era may be the best chance we have left to solve a number of intertwined strategic challenges, such as climate change and how to welcome 3 billion people into the global middle class over the next 20 years.
But it will make orthodox liberals and conservatives uncomfortable.
Fink has been building up to this for some time. His letters have attacked the short-term, quarterly mindset (PDF) of management; they have elevated the goal of sustainable, long-term growth; and they have been coordinated in concert with a business-led policy-and-standards campaign called "Focusing Capital on the Long Term." It is a remarkable story that belies the deep anxiety institutional investors have about the future.
The founder of the world’s largest asset manager also knows that the $6 trillion his firm oversees offers only limited influence. That’s why index funds figure prominently in this year’s epistle: the passive vehicles restrict the extent to which Fink and his colleagues can sell outright the stock of companies that do not meet Blackrock’s standard of corporate citizenship. In fact, Fink reports that "only" $1.7 trillion of their investments are actively managed public equities.
That means most of Blackrock’s influence must be exercised through shareholder activism: "We must be active, engaged agents on behalf of the clients invested with BlackRock, who are the true owners of your company," Fink writes. To drop an observation like that signals Fink is not kidding around.
Fink sees himself as a champion of working people saving for retirement. Because of that, he is a capitalist of a different sort, a long-term investor. Because of his fiduciary obligation to grow the savings of millions of hard working people, he shares more in common with value-builder Warren Buffett than value-extractor Carl Icahn. With a long-term horizon, Fink understands that addressing climate change, addressing the future of work and ensuring a diverse board and workforce are all imperatives. Without them, the growth he seeks will not be sustained.
With gridlock defining Washington, long-term investors are positioned to increasingly call the shots because only they have the scale of funds available to influence CEO behavior and invest proactively. To get a sense of that scale, the top 400 institutional investors control roughly $65 trillion in assets, sufficient to develop and fund a game-changing investment hypothesis in the U.S. and other nations that would override many structural impediments to global prosperity, security and sustainability in the 21st century.
Today, among pension funds, insurance companies and sovereign funds, not to mention many large family offices, capital has formed at such scale that its managers need to think about the health of the system itself. This kind of institutional activism will not sit well with liberals or conservatives. It muddies the orthodoxies of both groups whose narrative of the economy was formed in the early-to-mid 20th century when these institutional investors did not exist at all or at least at a scale that mattered. At the time, the players were states, large corporations and financiers. We did not even have modern-day monetary policy.
It is still early days, and the investors are just beginning to understand the tools available to them and how to use them responsibly. For now, Fink discusses his intention to back his statements with a threat to sell the stock of non-responsive companies, or to change policies or board composition through proxy voting at shareholder meetings. This makes sense, of course, because his letter is to 1,000 CEOs, mostly of publicly traded companies, so he naturally focuses on their stock.
But to create the conditions those companies need to be successful in achieving purposeful long-term growth, Fink will have to look deeper and focus on a different component of the economic engine, fixed income. These are the mortgage securities, bonds and other low-rate, long-term annuities that put even the most ardent investor to sleep but which in fact lay the foundation — the economic operating system — which most publicly held companies will need fixed in order to deliver sustainable, long-term growth.
Fink himself points out the problem: "We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining." (emphasis added) One such government is the U.S., which has failed to adequately invest in the future for decades. If Washington looks like it’s going to be hamstrung for another three-plus years, then investors are going to have to consider investing in the fixed-income securities that will deliver the investments, in infrastructure especially, that sustainable, long-term growth requires.
And here’s where we begin to depart from both parties’ playbooks. If institutional investors begin to spend on sustainable infrastructure, they will fill the yawning gap left by the federal government. This will put people back to work, generating more demand generally and increasing contributions to retirement savings while reducing our collective environmental footprint.
All good effects. But for liberals, this dissipates the power of the state. For conservatives, this threatens the very brown business models the Republican party has been defending so — enthusiastically.
Personally, I applaud this new era of institutional activism. Long-term, data-driven managers with one eye on the health of the planet and one eye on the health of the economy turning savings into investment are the kinds of candidates I would want to represent me in Washington anyway. Let’s encourage Larry Fink to just cut to the chase.