On January 24, 2017, Laurence D. Fink, BlackRock Inc.’s Founder, Chairman and CEO, published BlackRock’s annual letter to CEOs. Highlights of the BlackRock letter are as follows:
- Globalization: On the heels of the 2016 U.S. Presidential election, the BlackRock letter acknowledged the challenges that a globalized economy poses to millions of workers around the world and the impact of globalization on uneven wage growth and wealth inequality—a theme that was repeatedly emphasized throughout the 2016 U.S. Presidential election. The BlackRock letter advises companies to adapt their strategies to the social, political and economic consequences of globalization. Moreover, the BlackRock letter notes that, as BlackRock engages with companies this year, it will ask: “How have these changes [regarding globalization] impacted your strategy and how do you plan to pivot, if necessary, in light of the new world in which you are operating?”
- Environmental, Social and Governance Factors: BlackRock notes that non-financial metrics, including environmental sustainability and corporate social responsibility, can provide insights into management’s effectiveness and a company’s long-term prospects. Accordingly, the BlackRock letter states that BlackRock will be looking: “…to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company, and recognition of the company’s role as a member of the communities in which it operates. A global company needs to be local in every single one of its markets.”
- Caution Regarding Share Buybacks and Dividends: The BlackRock letter emphasized that while it supports return of capital to investors through buybacks and dividends in certain circumstances, companies should be careful to balance return of capital with investment in growth: “Companies have begun to devote greater attention to these issues of long-term sustainability, but despite increased rhetorical commitment, they have continued to engage in buybacks at a furious pace. In fact, for the 12 months ending in the third quarter of 2016, the value of dividends and buybacks by S&P 500 companies exceeded those companies’ operating profit. While we certainly support returning excess capital to shareholders, we believe companies must balance those practices 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.”
- Intersection of Tax Reform with Prudent Capital Allocation: The Trump administration has stated that it will look to implement tax reform for U.S. companies. To the extent that a Trump presidency incentivizes the repatriation of corporate cash trapped overseas, the BlackRock letter states that BlackRock will be asking companies the following regarding such repatriated cash: “Will it be used simply for more share buybacks? Or is it a part of a capital plan that appropriately balances returning capital to shareholders with prudently investing for future growth?”
- Greater Employer Responsibility for Employee Retirement Programs: The BlackRock letter points out that, over time, the burden for retirement savings increasingly has shifted from employers to employees. The BlackRock letter states that “. . . companies must lend their voice to developing a more secure retirement system for all workers, including the millions of workers at smaller companies who are not covered by employer-provided plans. The retirement crisis is not an intractable problem. We have a wealth of tools at our disposal: auto-enrollment and auto-escalation, pooled plans for small businesses, and potentially even a mandatory contribution model like Canada’s or Australia’s.” The BlackRock letter further suggests that companies take a proactive approach to ensuring the viability of their employees’ retirement planning in a globalized world, including through the use of technology and increased training for employees with respect to financial literacy.
A full text copy of the 2017 BlackRock letter is available here.