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Source: The New York Times | DealBook, April 13, 2015 article

BlackRock’s Chief, Laurence Fink, Urges Other C.E.O.s to Stop Being So Nice to Investors

April 13, 2015

Laurence D. Fink, who oversees more than $4 trillion of investments as chief of BlackRock, the world’s largest asset manager, says shareholder-friendly steps hurt long-term creation of value. Credit Mark Lennihan/Associated Press


On Tuesday morning, the chief executives of 500 of the nation’s largest companies will receive a letter in the mail that will most likely surprise them.

The sender of the letter is Laurence D. Fink, chief executive of BlackRock, the largest asset manager in the world. Mr. Fink oversees more than $4 trillion — that’s trillion with a “t” — of investments, making him perhaps the world’s most important shareholder.

He is planning to tell the leaders that too many of them have been trying to return money to investors through so-called shareholder-friendly steps like paying dividends and buying back stock.

To Mr. Fink, these maneuvers, often done under pressure from activist investors, are harming the long-term creation of value and may be doing companies and their investors a disservice, despite the increases in stock prices that have often been the result.

“The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Mr. Fink writes in the letter. He says that such moves were being done at the expense of investing in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

At a time when most investors are clamoring — and applauding — high dividends and bigger buybacks, Mr. Fink is bucking the trend.

United States companies spent nearly $1 trillion last year on stock repurchases and dividends, and virtually every big American company is engaged in these practices. General Electric announced last week that it would buy back $50 billion of its stock after selling most of GE Capital. Apple authorized a $90 billion buyback of its own stock last year. Exxon Mobil spent $13 billion last year on its own stock. IBM, which I’ve questioned for its aggressive use of buybacks and dividends, has spent $108 billion buying back its own shares since 2000.

Rather than consider the return of all this money to shareholders positively, Mr. Fink says the move “sends a discouraging message about a company’s ability to use its resources wisely and develop a coherent plan to create value over the long term.” Moreover, he argues that “with interest rates approaching zero, returning excessive amounts of capital to investors” isn’t helpful because they “will enjoy comparatively meager benefits from it in this environment.”

Mr. Fink and I have been discussing — and debating — this topic for more than a year. Last week, before mailing his letter, which he writes annually, he shared it with me.

“I feel the same pressures as other C.E.O.s,” he told me. But he suggested that it’s not just the fault of managements for being so shortsighted — the investors themselves may be the problem. “Investors need to focus on long-term strategies and long-term outcomes,” Mr. Fink said, suggesting we’re currently living in a “gambling society.”

Mr. Fink has a novel suggestion for encouraging shareholders to take a broader perspective, but it may very well upset his peers on Wall Street. He recommends that gains on investments held for less than three years be taxed as ordinary income, not at the usually lower long-term capital gains rate, which now applies after one year.

“We believe that U.S. tax policy, as it stands, incentivizes short-term behavior,” he writes in his letter. “Since when was one year considered a long-term investment? A more effective structure would be to grant long-term treatment only after three years, and then to decrease the tax rate for each year of ownership beyond that, potentially dropping to zero after 10 years.”

Mr. Fink contends that such a shift in tax policy “would create a profound incentive for more long-term holdings and could be designed to be revenue neutral. In short, tax reform that promotes long-term investment will benefit both the companies who rely on capital markets and the hundreds of millions of people saving for retirement.”

Asked whether such a change in tax policy would reduce liquidity in the market, Mr. Fink scoffed: “I don’t think Warren Buffett cares about liquidity that much.”

It is refreshing to see a finance executive talk some sense on these issues.

However, Mr. Fink is not simply being altruistic. To some degree, he is talking his own book: BlackRock’s business model, unlike those of so many finance companies that rely on trading fees, does not require it to turn over its portfolio. Given its size and scale, BlackRock often holds its investments for decades.

So from a financial perspective, Mr. Fink has little to lose. In fact, the firm may have much to gain if tax rules were adjusted to be more favorable to the way Mr. Fink invests. (And what’s the harm in suggesting tax policy change, as smart as it may be, that has a low probability of ever happening?)

That’s not to suggest Mr. Fink doesn’t believe what he’s saying; he does. He is a relatively progressive finance executive who has been a longtime Democrat and has taken positions that many of his peers in finance abhor.

To Mr. Fink, the shortsightedness that pervades corporate America is just a symptom of a larger issue. “This is not just a corporate problem,” he said. “It’s a societal problem, whether it’s health care or politics or business.”

He also said he recognized that his letter might not be popular in certain quarters but he qualified his approach by saying, “I’m not trying to make friends or enemies.”

Despite his protestations, Mr. Fink said, “There is nothing inherently wrong with returning capital to shareholders in a measured fashion.” He added, “Nor are the demands of activists necessarily at odds with the interests of other shareholders.” But it’s when it is taken to extremes — such as it seems to be in the current marketplace — that has Mr. Fink concerned.

Still, Mr. Fink is taking a direct shot at the rise of activist investors, like Carl C. Icahn, who have made careers out of pressing companies to return cash to shareholders.

Mr. Fink said he met with two activists last week. One of them, he said, told him, “You hate me, don’t you?”

“No, I don’t hate you,” Mr. Fink said he replied. “I’m just trying to get some balance.”

A version of this article appears in print on April 14, 2015, on page B1 of the New York edition with the headline: Quit Bowing to Investors, Fellow Chief Urges.

Copyright 2015 The New York Times Company


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