On Larry Fink's 2020 Letter to CEOs

On Larry Fink's 2020 Letter to CEOs
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Perhaps I am being too traditional, but I believe Larry Fink is simply looking out for BlackRock's shareholders, not the world at large or his stakeholders. As CEO, you can always look at stakeholders through the lens of shareholder wealth maximization. It may look like something else, but I believe that is basically what is happening here.

Don't get me wrong. As CEO of BlackRock, that is what he should be doing. His fiduciary duties are owed to the shareholders of BlackRock. Let us not forget that very basic point. In regard to his new strategy of focusing on climate change and sustainability, he is presenting a marketing strategy that will hopefully increase BlackRock's long-term profitability for the benefit of his shareholders.

It is no secret that the index fund business has become cut throat and does not appear to be generating fees for anyone, including BlackRock. One way to increase fees is to convince investors that that the world will be a better place if they would just invest in “sustainable” funds. Why? Because these funds come with higher fees to cover expenses such as identifying stocks to exclude and the purchase of virtue ratings to tell them which companies are politically correct. If investors buy into this marketing, that is their business. What I find particularly worrisome is the following quote found in the letter:

“We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”

My concern is that BlackRock will go beyond utilizing the voting power found in their new “sustainable funds” for purposes of climate change activism and inappropriately combine them with the voting power of plain vanilla index funds, helping to enhance the probability that their activism will be successful. If so, then this would be an opportunistic use of the voting power found in these traditional funds, benefiting the fiduciary, not the beneficial investors.

That is, I would think that most beneficial investors in traditional funds would have no interest in taking this new approach to investing: an approach where the objective of minimizing the impact of climate change takes center stage with increasing shareholder value. Having multiple objectives does not allow a corporation to maximize in terms of shareholder wealth. 

Beyond BlackRock's enhanced ability to market its new sustainable funds, the result would be plenty of beneficial investors in traditional funds who would not receive what they signed up for: a traditional focus on maximizing shareholder value, including when BlackRock votes its shares. Moreover, other expected results include poor corporate governance as a result of increased shareholder interference, another reason for unicorns not to go public, and, most importantly, reduced returns for investors. If I were the SEC, I would consider any combining of voting power to be a breach of BlackRock’s fiduciary duty to its beneficial investors. This must not be allowed.

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