After my missive yesterday, why would I believe there is a chance for change?

Because one of the largest hedge-fund/corporate raiders (it prefers to claim it i s an “asset manager”) claims to have finally found the light.  This firm has some $ 6+ trillion held in 401(k) plans, mutual funds, and exchange-traded funds- which makes it the largest single investor in the world.  As such, it can theoretically control who serves as directors and CEO’s of public entities.

Laurence D. Fink, the CEO and founder of BlackRock, Inc., sent out his annual letter to US and global firm leaders and admonished them to stop buying back their stock.  Yup.  After capitalizing on this technique for years  (financial re-engineering and buybacks have been the stalwart operations of BlackRock for years), Larry claims to have seen the light. So he now expects public companies to invest their capital to energize the long-term growth of their firms. (It’s about time!)

More importantly, he charged these firms with the mission to elevate social purposes to be on an equal footing with the need to aggrandize corporate profits.

By George, I think he’s got it! Larry Fink is using his annual letter to tell Big Business it’s time to go back to its roots- to reconnect with their communities, to treat their employees as partners in their progress, and to develop long-term results for their enterprises.  His exact words:  “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…”

If that was all he said, I’d be thrilled.  But, he said more.  That with “many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining…society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.”

This was not a letter out of the blue.  (The content certainly was!)  Because every year, Fink has sent out a letter, ensuring it arrives on the desks of the directors and executives of public firms (this year,  the letter was sent to  executives of 1000 such firms) right before the advent of the Davos World Economic Forum (the festival for the 1%ers).  And, that was Fink’s intent- the timing of his letter’s arrival is not a coincidence.    Fink wants to see this discussed at the Forum.

The fact of the matter is, however, that BlackRock’s equity investment is via index funds.  That means BlackRock doesn’t own individual company stocks.  Instead, its stock holdings are part of a portfolio of companies that have been chosen to match a given index (e.g., S&P 500 [500 Big Board companies], Russell 2000 [small companies], or the DJ Wilshire 5000 [mimicking the stock market]).  So, moving in and out of individual stocks that don’t follow Fink’s advice is not in the cards.

(Which explains a big problem.  After all, via its holdings, BlackRock owns 6% of Apple.  And, Apple has been the largest re-purchaser of its own stock for years.  Now, I don’t know about you- but I haven’t heard Fink advise Apple to stop this practice yet.  And, given that their Apple holdings are part of larger portfolios, Fink’s proclamation may turn out to be an example of ‘do as I say and not as I do’. 

And, while, Fink has railed against “activist” investors [I read that term as vulture investors] that force companies to focus on short-term results so that these “activist” can also reap large rewards as they sell their holdings and exit as a stockholder, BlackRock’s past actions belie that sentiment.  It has sided with Nelson Peltz in his proxy fight with Proctor and Gamble.  It has sided with Bill Ackman in his battle with ADP.  In total, BlackRock voted for “activist” actions about 20% of the time in 2017.)

But, in his letter Fink addresses what he sees as the inevitable results of the Tax Cuts and Jobs Act [sic] bill that was signed into law by TheDonald right before Christmas 2017.  Fink states he is worried that “[t]ax changes will embolden those activists with a short-term focus to demand answers on the use of increased cash flows… [so] companies who have not already developed and explained their plans will find it difficult to defend against these campaigns.”

But, BlackRock has impediments to effecting this change.  Besides the inability to dump an ‘offending’ stock holding when it is part of a mutual fund, there is another issue with the index funds.   Many of us have been complaining that the index fund managers are the proverbial “see no evil” prototypes.  Those managers stand mute while prices are raised and  executive salaries skyrocket without promoting the long-term growth of their firms.  Which is exactly why the wealth gap is yawningly wide and the American Dream is fading off into the horizon.

Nevertheless, Laurence Fink’s  exact words almost inspire.  He complains that many of us today express a “widespread aversion” to crony capitalism and to the “soulless corporation”.  And, that is why reigniting the doctrine of social responsibility is “one way for a corporation to generate goodwill as a byproduct of expenditures that are entirely justified in its own self-interest.”

With its significant holdings of index funds,  BlackRock could still affect the way companies reward their CEO’s.  Of course, that would mean a radical change in the way BlackRock works.  After all, up to now, BlackRock has supported corporate CEO pay packages some 99%  of the time.  (Unless BlackRock thinks only 5 companies haven’t met these new (or is that old) standards of the social compact.)

Now, the question is whether this letter will yield the same radical change in business philosophy as did Milton Friedman’s New York Times article.  I can only hope.  So can you.

Because America- and the world- needs it.

Tomorrow, I will share the entire text of Larry’s letter.