BlackRock chief calls for more long term thinking by major companies

6 February 2016

Editor

EU regulation

The chairman and chief executive of investment giant, BlackRock, Larry Fink has written to the chief executives of major companies in the US and Europe encouraging them to think long-term and to provide their shareholders with more forward-looking plans. Fink wrote a similar letter last year, suggesting that companies have yet to take enough notice of his concerns.

Talking on CNBC's Squawk Box show, Fink said the letter was written following discussions with his corporate governance and proxy teams. They reported to him that it was hard for them to understand the direction in which companies were going. This meant if there was a proxy dispute or a move by an activist shareholder it took a lot of time to look into the company and understand the best decisions to take as investors.

He said he was asking the companies to "provide us with a strategic plan of how your company is going to evolve" which he thinks will provide them with a "better barometer or matrix" to help them decide how a company is performing". Fink also wants letters to shareholder in annual reports to be more forward-thinking. Fink added that when a chief executive has a business plan they should affirm that the plan was reviewed with the board. If a chief executive is then replaced it meant investors can legitimately ask the board didn't you sign up to that plan?

Fink said more and more companies are not giving earnings guidance, and he clarified that he was not advocating for an abandonment of quarterly earnings reports, just arguing for a different lens through which they are viewed.

"It's not as important ... if you miss by a theoretical penny with the analyst. You could talk through the lens of your long-term plans. And I actually believe it gives us a better dialogue between your shareholders and obviously company management," he said.

In the letter Fink reportedly said that those activists who focus on long-term value creation sometimes do offer better strategies than management. In those cases, BlackRock’s corporate governance team will support activist plans. During the 2015 proxy season, in the 18 largest U.S. proxy contests (as measured by market cap), BlackRock voted with activists 39% of the time.

However, he added that BlackRock believes that companies are usually better served when ideas for value creation are part of an overall framework developed and driven by the company, rather than forced upon them in a proxy fight. 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 a company's annual financial results in the proper context.

Fink's letter also reportedly said that 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, he said, offered both risks and opportunities, but for too long, companies had not considered them core to their business – even when the world’s political leaders were 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 – had real and quantifiable financial impacts, he said.

At companies where ESG issues are handled well, they are often a signal of operational excellence. Fink said that BlackRock had been undertaking an effort over several years to integrate ESG considerations into its investment processes, and the investment manager expected companies to have strategies to manage these issues.

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