In his annual letter to the leaders of the companies in the S&P500, BlackRock chief executive Larry Fink renewed his calls in last year’s letter for a long-term focus.
“Many companies responded [to last year’s BlackRock letter] by publicly disclosing detailed plans, including robust processes for board involvement,” Mr Fink said.
However, the assumptions underpinning those plans – namely sustained low inflation and the expectation for continued globalisation – have been “upended” over the past 12 months, he said.
“Brexit is reshaping Europe; upheaval in the Middle East is having global consequences; the US is anticipating reflation, rising rates and renewed growth; and President Trump’s fiscal, tax and trade policies will further impact the economic landscape,” Mr Fink said.
“At the root of many of these changes is a growing backlash against the impact globalisation and technological change are having on many workers and communities.”
Mr Fink said the dynamics of the “new world” have far-reaching political and economic ramifications that affect “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,” he said.
Many of BlackRock’s clients, who are invested in index-linked products, are “definitive” long-term investors, Mr Fink said – and BlackRock will not hesitate to advocate on their behalf.
“When BlackRock does not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect our clients’ long-term economic interests, we do not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation,” he said.
He was particularly critical of the practice of companies buying back their own stock.
“While we certainly support returning excess capital to shareholders, we believe companies must balance those practices with investment in future growth,” Mr Fink said.
“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.
“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,” Mr Fink said.
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