Each year, Larry Fink, CEO of BlackRock (the world’s largest investor), crafts his annual letter to “advocate governance practices that BlackRock believes will maximize long-term value creation.” In this year’s letter, dated January 24, Fink wants to know how public companies are incorporating “the underlying dynamics that drive change around the world” into their strategic planning process.
He provides an overview of geopolitical events of the past 12 months and global labor market dynamics and says he wants CEOs to answer these two questions:
“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?”
Fink also highlights how environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and asks that CEOs discuss the following issues as they engage with stakeholders during the 2017 proxy season:
Sustainability of the business model and company operations as they relate to environmental, social, and governance factors. “A global company needs to be local in every single one of its markets.”
- The company’s priorities for investing in research and technology as well as the development and long-term financial well-being of employees. “The events of the past year have only reinforced how critical the well-being of a company’s employees is to its long-term success.”
- How capital allocation strategy balances returning excess capital to shareholders with investment in future growth. “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 advocates for corporate and government policies that will help shift “the tide of short-termism afflicting our society”, including:
- a capital gains regime that rewards long-term investments over short-term holdings;
- if tax reform includes reduced taxation for repatriation of cash, an explanation of whether they will bring cash back to U.S. and if so, how they will use it;
- improved corporate capacity for internal training and education of employees to better compete for talent in a global economy;
- development of a more secure retirement system for all workers; and
- a concerted effort to build financial literacy in the workforce to help solve the retirement crisis.
Fink warns that where companies are not making sufficient progress toward creating long-term value, “we will not hesitate to exercise our right to vote against incumbent directors of misaligned executive compensation.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.