Fink: Measures to Enhance Shareholder Value Can be Strategically Shortsighted

Apr 14 2015 | 4:00pm ET

BlackRock’s Larry Fink has renewed his criticism of Wall Street's short-term focus in an open letter to Fortune 500 CEOs published on Tuesday.

Fink has been a vocal opponent to strategies, often employed by activist hedge funds, designed to enhance shareholder value. These steps often include asset sales, dividend payments, and stock buybacks.

Fink believes such actions can be strategically shortsighted. They come at the expense of “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth,” according to the letter. 

Fink is no stranger to Wall Street. He is the CEO of BlackRock, the largest asset manager in the world. Yet in his letter, he faults his fellow financiers with focusing too much on the short-term impact and believes they be doing both the companies and their fellow shareholders a disservice by pressuring management teams to execute so-called shareholder friendly moves, the letter says.

Fink points out that he finds nothing wrong with returning excess capital to shareholders, but thinks such moves are better as part of measured, thoughtful strategies. The danger exists when activist agendas are taken to an extreme, placing the immediate short-term interests of shareholders to generate tactical returns against the long-term interests of the company to build value. 

“Corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their companies’ shares at any moment in time,” Fink writes, “But to the company and its long-term owners.” Necessarily, this requires managers resist the pressure of short-term shareholders to extract value from a company if it would jeopardize value creation over the long term. 

However, the letter does not let corporate management off the hook. While the board is a company’s first line of defense against the short-term pressures Fink criticizes, at the same time he notes that such support is “more difficult to do where management has not articulated a clear long-term vision, strategic direction and credible metrics against which to assess performance. In such cases, we will take action to ensure that the owners’ interests are effectively served.” 

Fink also suggested developing tax policy that would encourage long-term thinking instead of short-term behavior. He suggests granting long-term capital gains treatment to investments held three years instead of the current one, and dropping the rate for each year after that.

After held for ten years, the tax rate could potentially be zero - providing strong incentive to hold for the long haul. “Since when was one year considered a long term investment?” Fink asks in the letter.  

The letter points out that dividends and buybacks can be a vital part of a responsible capital strategy, and that the demands of activists are not necessarily at odds with the interests of other shareholders. "Some activist investors take a long term view," the letter states, "And have pushed companies and their boards to make productive changes."

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