Andrew Ross Sorkin, author of the definitive financial crisis tick-tock, should know what a firestorm is. But when he says that an anodyne letterfrom BlackRock’s Larry Fink “is likely to cause a firestorm in the corner offices of companies everywhere,” you have to wonder.
The letter is Fink’s attempt to be a Good Corporate Citizen, just in time for Davos. There’s lots of talk about Strategy, Purpose, and the like – the kind of language that Davos Man is entirely fluent in. What there’s not is any baring of teeth, or any reason for CEOs to be worried.
Sorkin, having read the letter, has somehow come to the conclusion that Fink has “declared that he plans to hold companies accountable”. But I too have read the letter, and, well, I can’t find that bit. Maybe it’s hidden in the sentence where Fink talks about his actively-managed funds selling shares in a company “if we are doubtful about its strategic direction”.
As Sorkin says, however, Fink’s real clout comes not from his active portfolio, but rather from the trillions of dollars he oversees in indexed ETFs. And there, as Fink himself admits in his letter, his hands are rather tied. In those funds, he writes, “BlackRock cannot express its disapproval by selling a company’s securities as long as that company remains in the relevant index.”
So, what is Fink doing? Sorkin seems to think that he’s upping his activist game, voting against companies’ preferred directors more often, and generally throwing his weight around a bit more often than he used to. That’s true – but it’s also nothing new. And in fact, in this new letter, Fink says that up until now he has focused too much on proxy votes.
Just talking, no more, might sound a bit weak. Indeed, it is a bit weak. The fact is, though, that index investors by definition are negotiating from a position of weakness, since they have to hold on to their shares no matter what.
What’s more, index investors compete almost entirely on fees. Any money they spend on corporate-governance issues is money their competitors can save by simply sitting back and doing nothing. So any index-fund manager is going to have a strong bias towards doing nothing cheaply. That’s how you amass assets, and that’s what BlackRock used to do in the past.
The next step, if you want to be a little bit more engaged, is to wake up and start paying attention when there’s a proxy fight. Shareholders should take sides during such fights, as an index fund you’re a big shareholder, and so you really ought to vote one way or the other. Which is what BlackRock has started doing of late. The problem is that you end up putting all your corporate-governance energies into companies that activist hedge funds care about, which are always going to be a tiny minority of the whole.
Which brings us to the third step, the new thing which Fink is talking about in his letter. Instead of just engaging with companies in the middle of proxy fights, he wants to talk to those companies, and their board members, on an ongoing basis, and ask them questions about their strategy and sustainability.
Of course the companies will take those meetings: BlackRock is always going to be one of their largest shareholders, after all. But the big unanswered question is: Will all those meetings actually change anything?
I suspect that the answer depends on how you look at it. On an individual case-by-case basis, it’s going to be hard if not impossible to find any specific company which changes its ways after a meeting with BlackRock’s “investment stewardship” team. The team will ask big high-level questions, the company will give big high-level answers, everybody will feel that much better about themselves, and nothing visible will change.
On the other hand, on a global basis, the sheer weight of all those meetings, with all those CEOs and board members, might just nudge a few close board-level decisions one way rather than another. We’ll never know the counterfactual, of course, but it’s likely that simply talking about social issues with big shareholders will subtly change board members’ priorities somewhere.
A firestorm, then, this is not. It’s much smaller and subtler than that. But when you have $6 trillion of assets under management, even a gentle nudge, if sustained from quarter to quarter and from year to year, can end up making a real difference.
It’s certainly better than doing nothing.