Larry Fink’s annual letter to CEOs is in danger of becoming an eagerly anticipated event. The boss of the world’s largest money manager, BlackRock, is perhaps not loved to quite the same degree as Warren Buffett, but he is respected and even – thanks to his epistles’ best efforts – somewhat feared.
BlackRock is far from an activist – a Proxy Insight study from last week showed that it votes against management in say on pay resolutions just 9% of the time, and only 25% of the time Institutional Shareholder Services recommends that it should – but it has been at the center of an ongoing discussion about activism, and where the average institutional investor should sit. In this respect, it has swayed with the wind.
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Last year, Larry Fink wrote to CEOs urging them to draw up long-term plans for value creation and to present them to investors. If they were up to scratch, BlackRock would help shield them from pesky activists who wanted buybacks or a quick sale.
Fink’s latest letter turns this on its head. Given the turmoil of the past year, adaptability is now the name of the game. “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,” Fink writes. “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?”
In a world with fewer proxy fights – down by one-third in the U.S. over the past year and with Marathon Petroleum, Bob Evans Farms and perhaps Ashford Hospitality Prime already seeking to avoid contests by settling early – BlackRock’s engagement is in danger of becoming more of a compliance task than a meaningful intervention. To be sure, it still scoffs at the “furious pace” of buybacks, and wants fewer of them. “Companies should engage in buybacks only when they are confident that the return on those buybacks will ultimately exceed the cost of capital and the long-term returns of investing in future growth,” Fink says.
Companies could prioritize investment and employee training in place of buybacks, of course, but BlackRock’s portfolio managers are just as keen to make money for their clients. Uncertain investments may prove risky undertakings for CEOs who are then asked to showcase the flexibility of their companies next year. Proxy Insight data show BlackRock voted for at least one dissident nominee in seven contests last year. As such, it may be time to stop second guessing Larry Fink.
Article by Activist Insight