Odds are very high that any publicly traded company has institutional investors. That is just the way the world works these days. Among America’s largest companies, 72% of their ownership is by institutional investors (the big ones being BlackRock, Vanguard, UBS Group, Fidelity, Statestreet, Morgan Stanley). These and many other institutional investors also invest in smaller publicly traded companies. Since by law and court precedent Boards work for their shareholders, every director in every publicly traded firm should care about what these big institutional investors think. The biggest and most influential of all is BlackRock with $9.5 trillion under management.
So when BlackRock CEO Larry Fink takes time to put his views into writing, we should all pay attention.
Fink just published his annual Chairman’s letter. In it he emphasized what he thinks is important, including the need for publicly traded companies to have a sense of purpose, to build resiliency, to care about sustainability and to drive long-term growth and value creation.
He asserts that companies with a clear sense of purpose are better equipped to navigate challenges, attract talent, and build stronger relationships with stakeholders. Fink further highlights that companies should prioritize environmental, social, and governance (ESG) factors in their operations and decision-making, which can lead to improved financial performance and resilience in the face of market turbulence.
Fink also discusses the role of asset managers in addressing global challenges like climate change, resource scarcity, and inequality. He stresses the need for a just transition to a more sustainable economy, emphasizing that asset managers should actively engage with companies to drive change and enhance transparency around ESG risks and opportunities. Fink underscores BlackRock’s commitment to being a leader in the sustainable investment space, helping clients navigate the transition to a low-carbon economy and advancing efforts to achieve net-zero emissions by 2050.
A few other topics that Boards should track from this letter:
- Technology has made financial markets more affordable, transparent and accessible. It cannot eliminate risks, and may introduce some new ones, but it adds value and that value is key.
- Fink believes the current situation with banking will lead more firms to seek access to capital markets for their financing. He also believes many corporate treasurers are considering having their bank deposits swept nightly to reduce even overnight counterparty risk.
- Fink believes the Federal Reserve will stay focused on fighting inflation and continue to raise rates.
- The rising interest rates will force governments to find ways to reduce current levels of fiscal spending.
- The transformation of the global environment (as we wrote about in our 2023 OODA Almanac) is dividing communities and impacting workers globally. The war in Ukraine was a key event but the seeds of this transformation were put in place long ago due to societal changes, demographic changes and the needs for national security and defense of open nations.
- Covid heightened this changed environment and has led to greater protectionism and polarization. Fink believes the lack of face-to-face interactions has had a profound effect on humanity. We have to agree.
- We also found strong agreement with Fink’s articulation of the status of global supply chains. No company or government wants to have supply chains dependent on geopolitical tensions.
- These factors combined, but especially the desire to re-work supply chains via friendshoring and reshoring, are big drivers keeping inflation high, according to Fink.
- “This may produce better national security outcomes with more resilient and secure supply chains. But in the near term, the effects are highly inflationary. This tradeoff between price and security is one of the reasons I believe inflation will persist and be more difficult for central bankers to tame over the long term. As a result, I believe inflation is more likely to stay closer to 3.5% or 4% in the next few years.“
- We are 100% in concurrence with Fink’s assessment that North America could be one of the biggest global beneficiaries of the transformed global economy. His reasons: “We have a large and diverse labor force. We have abundant natural resources, with the potential for both energy and food security. Public policy is helping to keep chip manufacturing in the U.S., and the latest innovations in AI have become a new preoccupation.”
- Fink is not afraid to talk about Bitcoin and the potential of digital assets to transform industries, which sets him apart from many of his peers. He sees a dramatic transformation already underway in the digital asset space and believes this will bring down the cost of financial services. He points out that the US is lagging behind in innovation. BlackRock is exploring the use of a digital asset ecosystem for tokenization for stocks and bonds.
What did we wish we saw more of in Fink’s letter? It is obvious: More on how businesses can create more value and be more productive using technology and reduce digital risk while doing so. Would have been great if he would have acknowledged and perhaps even endorsed the new SEC guidance on boards and cybersecurity that have been circulating for the last year.
For more see: Larry Fink’s Annual Chairman’s Letter