BlackRock chief urges chief executives to invest in long-term growth
Businesses should use their capital to generate sustainable returns, says BlackRock co-founder
BlackRock's Laurence Fink, whose firm is the largest shareholder in companies from Apple to JP Morgan Chase, is repeating his call to chief executives to engage with shareholders and be more transparent about balance-sheet decisions.
Following up on a January 2012 letter in which he urged 600 of BlackRock's largest holdings to adopt shareholder-friendly practices, Fink wrote last week to the heads of all companies in the S&P 500 Index, asking them to focus on sustainable returns and not give in to short-term pressures.
"I write today reiterating our call for engagement with a particular focus on companies' strategies to drive longer-term growth," the chief executive and co-founder of BlackRock wrote in the letter. "It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies."
The ‘trust us, we know what we’re doing’ approach is very old-fashioned
BlackRock is the world's largest money manager with US$4.3 trillion in assets and stands out for its approach, as traditional fund firms are not usually as vocal about corporate practices at companies whose shares they hold. The firm has a 20-person corporate governance team that seeks to protect investment assets and increase client returns. BlackRock owns stock through its active funds as well as index products through iShares, the world's largest provider of exchange-traded funds.
Fink's letter was motivated in part by the large amount of cash companies had on their balance sheets, said Michelle Edkins, the firm's global head of the corporate governance group. She said BlackRock wanted to make sure executives thought carefully and then communicated to shareholders what they planned to do with their cash as the economy continued to recover.
"We believe returning cash to shareholders should be part of a balanced-capital strategy," Fink said. "However, when done for the wrong reasons and at the expense of capital investment, it can jeopardise a company's ability to generate sustainable long-term returns."
Activist investing, in which shareholders take stakes and push for changes at companies they see as underperformers, affected a "tiny portion" of firms BlackRock invested in and was not the trigger for the letter, Edkins said. The firm owns shares in almost 4,000 companies in the United States and she said only about 50 of them were in dialogue with activists.
"Our starting point is to support management, but that's incumbent on management saying to us and setting up very clearly what they plan on doing with the client money," she said. "The 'trust us, we know what we're doing' approach to management is very old-fashioned."