Each year, the CEO of the world’s biggest fund manager writes a letter to other CEOs to keep them on their toes.
This year, BlackRock’s Larry Fink has raised the bar, telling leaders they’ll be judged on their ability to navigate a series of recent events that have “upended” the world order. If they don’t, the myriad companies in which BlackRock holds a stake face a vote against executive pay packets or the election of their directors.
Brexit is reshaping Europe, the U.S. is suddenly facing “reflation” amid rising interest rates and President Trump’s policy agenda promises to further shake up the economic landscape. According to Fink, the root cause of all these changes is a growing backlash against globalization and technological advances that threaten people’s jobs.
To address the issue, he wants to see CEOs improve their company’s capacity for internal training and education. “Businesses will need to increase the earnings potential of the workers who drive returns, helping the employee who once operated a machine to learn to program it,” he said.
BlackRock also will examine how well business models can stand up to changing external economic and environmental factors and how much companies recognize their role as a member of the communities in which they operate.
How executives choose to deploy excess capital comes under the spotlight, given that Trump’s pledges to lower taxes could bloat many corporate balance sheets. Fink would like to see that capital invested in growth measures such as R&D and staff training, rather than squandered on questionable share buybacks that have been occurring “at a furious pace”.
“While we certainly support returning excess capital to shareholders, we believe companies must balance those practices with investment in future growth,” he said. “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.”
Trump’s move to lower corporate taxes also could encourage some large U.S. companies to repatriate trillions of dollars of income held overseas, giving them even more money to play with. One of Trump’s key economic advisors, activist investor Carl Icahn, has also has sounded a warning about excessive use of buy backs.
Fink’s letter comes a week after a senior BlackRock executive in Europe wrote to 300 British companies asking them to rein in any “excessive” executive remuneration or face potential dissenting votes at a string of upcoming shareholder meetings. BlackRock acted as British companies face new rules that give shareholders a binding vote on their pay policies at least once every three years.