February 4, 2016

Focus on the Long-Term and Resist Short-Termism Afflicting Corporate Behavior

Photo of Larry Fink: BlackRock
Laurence (Larry) Fink, Chairman and Chief Executive Officer of BlackRock, a New York, N.Y.-based investment firm, sent his annual Corporate Governance Letter to chief executives at S&P 500 companies and large European corporations. Mr. Fink's letter encourages corporate leaders to focus on creating long-term strategies and resist "the powerful forces of short-termism afflicting corporate behavior." While you can read the letter in its entirety, there are a few points worth discussing in this post.

The lack of transparency and openness on Wall Street has long been a concern of mine during my professional career. I am pleased to read Mr. Fink's message "that companies have an obligation to be open and transparent about their growth plans so that shareholders can evaluate them and companies' progress in executing on those plans." Mr. Fink continues to say: "We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation. Additionally, because boards have a critical role to play in strategic planning, we believe CEOs should explicitly affirm that their boards have reviewed those plans."

I spend a significant amount of my time reading reports issued by publicly-traded companies as required by the U.S. Securities and Exchange Commission and I am routinely disappointed these companies do not address management's vision and future plans. Therefore, I find encouragement in Mr. Fink's words:
Annual shareholder letters and other communications to shareholders are too often backwards-looking and don’t do enough to articulate management’s vision and plans for the future. This perspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth. Components of long-term compensation should be linked to these metrics. 
Mr. Fink also addresses how environmental and social factors are impacting corporate long-term plans:
These issues offer both risks and opportunities, but for too long, companies have not considered them core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord. Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts.
"At companies where ESG issues are handled well, they are often a signal of operational excellence."

It is too easy to blame companies for being too focused on the short-term; "investors, the media, and public officials have a role to play," according to Mr. Fink. "In Washington (and other capitals), long-term is often defined as simply the next election cycle, an attitude that is eroding the economic foundations of our country" and "public officials must adopt policies that will support long-term value creation."

Lastly, "Companies, for their part, must recognize that while advocating for more infrastructure or comprehensive tax reform may not bear fruit in the next quarter or two, the absence of effective long-term policies in these areas undermines the economic ecosystem in which companies function – and with it, their chances for long-term growth."

What are your thoughts about Mr. Fink's letter?

Aaron Rose serves as President and CEO of ROI3, Inc., a Seattle, Wash.-based company that empowers people in emerging economies through innovative, technology-based solutions. He is also the editor of Solutions for a Sustainable World.

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