“I’m Not Talking About This to Win a Popularity Contest”: An Interview with Larry Fink

Larry Fink is one of the most powerful players in global finance. The 63-year-old former securities trader cofounded and still runs the world’s biggest money-management firm, BlackRock, which controls assets approaching $5 trillion. And he’s on HBR’s 2015 list of the world’s top-performing CEOs. But what truly sets Fink apart is his desire to change the very financial system that made him who he is. Fink speaks out forcefully and often about the perils of short-term thinking, especially on Wall Street—a topic that has already found traction in the early days of the 2016 U.S. presidential campaign. A lifelong Democrat, he created waves in April 2015 when he sent a letter to the world’s leading CEOs urging them to ignore their activist shareholders and focus instead on the long-term health of their companies. In this edited interview with HBR’s editor in chief, Adi Ignatius, Fink talks about what motivates his crusade against short-term thinking and what it might take to change the system. HBR: Why so much about “short-termism”? Fink: I’m trying to change the narrative. We need a different voice. The media’s whole business model is predicated on short-termism: What’s happening in Moscow today, or Beijing, or Brooklyn? Why did the market move 0.2%? Banks are the same way: Their business is all about the velocity of money. Very few people are talking about the long term. What’s the cost of that? In this environment, it’s hard to talk about long-term concepts, such as retirement. And it’s hard for CEOs to focus on the long-term needs of their companies, given the short-term demands of many shareholders. I assume that the primary driver of short-termism is the metrics we use to measure performance. They are certainly a major component. But the phenomenon is deeply embedded in society. Think about how frequently we look at our phones now for e-mail. Society is faced with the immediacy of information, and we’re having a hard time dealing with it. Isn’t BlackRock itself contributing to the short-term investment environment? Not really. Of the $4.8 trillion we manage, $2.7 trillion is in the form of index-based assets. With those holdings, we own companies for as long as they’re on the index. That means we have to focus on long-term strategy. But if you’re index-based, you’re investing in a lot of companies that don’t share these values. That’s true. We own some really lousy companies. Unfortunately, that’s built in to an index—you own great companies and lousy companies. But we also have an “active” business. And there, if we don’t like the companies’ short-term or long-term strategies, we sell the stock. So what was the purpose of your letter to the CEOs? I wanted to tell them and their boards that there is another voice. At BlackRock we want companies to be more transparent about their long-term strategies so that we can measure them over a long cycle. If a company gives us a five-year or a 10-year business plan, we can measure throughout the period to see if it’s living up to the plan. Is it investing the way it said it would? Is it repaying capital to shareholders? What we’re seeing now is that companies often pivot because of the needs of their short-term investors. Are you opposed to activist investors? Well, activists can create benefits in the short run. But sometimes the end result is a crippled company that has been divested of its best components or has stopped innovating. Often we see companies greatly reduce their capital expenditures and R&D as a result of this short-term focus. A company can stop R&D and show fabulous short-term results. But over the long cycle, that’s devastating for the company and, if it’s American, probably for the United States as well. Do you think you have clout in this debate, given the assets that BlackRock controls? We’re not looking to have clout. We’re looking to offer a different opinion. We’re also, I hope, changing the dialogue and changing behavior. But we have the same fiduciary responsibilities everybody else does. We are trying to maximize returns for our clients over a long cycle. You’ve talked in the past about fiddling with the tax code to nudge people toward longer-term thinking. Yes, and this gets to the definition of “long-term.” Under the tax code, if you own a financial asset for more than a year, you’re rewarded for that “good” behavior with a sharply lower tax rate than if the dividends were ordinary income. But is one year really long-term? I’d suggest we change the tax code for capital gains to reward holdings of three years or more, and the longer the ownership, the lower the tax rate. If you sold sooner than that, your profit would be taxed at the ordinary income level. One might ask whether owning things longer is necessarily a good thing for society, but I think it would lead to better behavior. I assume this view is not popular with Wall Street. Well, it goes against Wall Street, which, as I said, makes money on the velocity of money. Certainly if people were holding assets longer, the velocity of money would slow down somewhat. Do you think this could ever get traction? If Congress were willing to tackle true tax reform, this component would at least be discussed. I certainly know many CEOs who would like to see this type of change. The traders of the world, the short-term people, wouldn’t like it. But I’m not talking about this to win a popularity contest. Rethinking Fiduciary Responsibility Should we redefine fiduciary responsibility to help move toward a longer-term perspective? That’s a good question. If a company fires 20,000 people because of pressure from investors looking to generate returns, its stock will perform well. But is that being a fiduciary? Under the courts of law and the definition of fiduciary responsibility, yes. But it’s clear that many people are being left behind. Given that, should maximizing returns really be one’s sole fiduciary responsibility? Wouldn’t most CEOs prefer to keep things as they are? Perhaps. But I’m talking from the perspective of investors, not of CEOs, because investor behavior is part of the problem. Investors want results now, and CEOs are caught up in that. But for, say, a public pension plan, is it really a fiduciary thing to give money to somebody who buys a company in your state and then destroys 20,000 jobs? Right now that’s considered fine. Ethan Hill What do you think it would take for the U.S. to reconsider the meaning of fiduciary responsibility? The Department of Labor would have to review the definition of the term. These days, if an investor says, “We believe in environmental issues, and we’re not going to invest in carbon,” that’s fiduciary. But what if that position costs 2% in total returns? Is it still fiduciary? I don’t know. I think it’s dicey when people say they want to walk away from certain asset classes. But it’s all very complicated. If you’re a public plan, you probably view job creation in your state as a good thing. But the law says only that you have to maximize returns. I’ve met CEOs who concede that to serve shareholders, they have to do things that are at odds with their values. Remember that the average tenure of a Fortune 500 CEO is only about five years. So imagine the CEO of, say, a pharmaceutical company that is thinking about investing in a drug that might require 10 years of testing. It would take a bold person to say, “I’m going to take on these expenses and potentially hurt my career in order to develop this.” Right now, in terms of protecting society, government is doing a very poor job. Government’s Role Let’s switch to the economy. Do you think the U.S. is on the right track? No other place has the vitality of this nation. Its private sector is the most dynamic in the world. I also think more highly of our educational system than some do—we have more than 800,000 foreign students in our universities. We must be doing something right. It sounds as if you have a “but.” The problem is the federal government, which is dragging the economy down. It can’t get anything done, and we still have a long-term entitlement problem, a deficit problem, a retirement problem. Do you worry that U.S. companies aren’t creating enough good jobs? Technology is rapidly disrupting jobs—an accelerating trend. And technology could dramatically upend trade. As we employ more robots and decrease the human component in manufacturing, we are likely to see more onshoring. If that happens on a big scale, global trade could collapse. What would that mean for the United States? Not much. But it would be devastating for developing countries. It could be the world’s next “black swan.” Do you see an asset bubble anywhere? Are you concerned about anything that’s building up? I think low interest rates are an asset bubble. Who’s causing it? Our regulators and central bankers. They say they’re worried about high-yield markets and emerging markets that are attracting so much investment. But that’s happening because people aren’t buying government securities—the interest rates are too low. Quantitative easing brought the price of government securities to such a low level that no one can afford to own them unless they’re required to for regulatory reasons. To put their money to work, people are being forced further along the risk curve. You came of age during the 1960s, a time when the U.S. government pursued big goals, such as LBJ’s Great Society. Do you think government can ever do things right? I’m a progressive, so I believe there’s a place for government. I believe in a strong central government. Government should make sure we don’t become too extreme one way or another. But in the past decade Washington forgot its role, and we went way beyond the acceptable “risk tails” and had the financial crisis. I also think that government should help support capitalism when things are blowing up. And I believe it should help those who can’t help themselves. But right now, in terms of protecting society, it’s doing a very poor job. What Makes Companies Great BlackRock invests in a wide range of companies. What characterizes the great ones? The average life span of an S&P 500 company is less than 18 years. That shows that you have to constantly regenerate yourself. There are many bad companies that have just a single product or a few products and don’t reengineer themselves; they don’t look at the ecosystem and see how it’s changing. Good companies have dynamic leaders and a process for developing new leadership. Great companies have a long-term strategy, and every quarter they look at how that strategy fits into their ecosystem—which is constantly changing. What are some companies that keep adapting? Netflix is pretty amazing. It cannibalized itself to go from a mail-order service to competing with Blockbuster to becoming a streaming company. Amazon could also become transformational. Its cloud and web services have had astronomical growth. At BlackRock we’ve reengineered ourselves three times since we went public, going from a bond-only investment firm to one handling bonds and stocks to one managing both active and passive holdings, including ETFs [exchange-traded funds]. Which business leaders do you admire? Plenty of CEOs have done fabulous jobs reengineering their organizations: Jeff Bezos at Amazon, Bob Iger at Disney, Andy Liveris at Dow Chemical, Jim McNerney at Boeing. But I don’t try to model BlackRock on any other company. We have our own issues. I know you get asked this a lot, but with $4.8 trillion in assets under BlackRock’s control, is the firm too big to fail? We’re an asset manager. We don’t have leverage. The $4.8 trillion is money that clients give us. We have to invest that money toward a singular contract. If we deviate, we violate our fiduciary responsibility. We’re not a juggernaut with everything invested in, say, Chile. “Too big to fail” is a bank concept. We’re not a bank.

“I’m Not Talking About This to Win a Popularity Contest”: An Interview with Larry Fink

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