Investors in a public company want one thing, gains. Rising share prices, dividend payments, or maybe even a buyout by a larger company; whichever way it happens, investors seek gains. Most investors and fund managers make decisions based on the short-term outlook of a company. This obviously adds volatility to an already unpredictable market.
Larry Fink, CEO of Blackrock, oversees over four trillion dollars worth of investments. Recently, he wrote a letter to the CEO’s in the S&P 500, regarding how companies focus on creating short-term gains. Blackrock is in a much different position than many other firms or single investors. Many of the firms and individual investors who use their funds are wealthy individuals looking to build and preserve wealth well into their retirement years. However, the average investor who probably has a couple thousand dollars in the New York Stock Exchange (NYSE) probably couldn’t care less about the long-term future value of the shares they own. This dichotomy is the source of the frustration of someone like Fink who is responsible for the wealth of the many of the wealthiest individuals in the world.
“While we’ve heard strong support from corporate leaders for taking such a long-term view, many companies continue to engage in practices that may undermine their ability to invest for the future.”-Larry Fink
The first issue for these companies is that these shareholders will pull their funding if the share prices are lower or dividends aren’t up to par. BlackRock is one of those players. They definitely don’t participate in the mass sell offs that plague the market during economic downturns, however companies still depend on the equity financing provided by BlackRock’s investors. It’s very hard to not have a short-term outlook when you see the price of your firm’s shares plummeting. Fink tries to address this issue by asking companies to better educate shareholders on their long-term goals.
“But one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses.”-Larry Fink
This issue is already solved, however, in the form of the 10-K. This lengthy annual report required by the SEC holds hundreds of pages of information about every publicly traded firm. One popular section is “Risk Factors.” This combined with “Key Acquisitions” should give a good picture of where the company wants to go and what risks are they exposed too. Most investors, however, don’t read this document. Honestly, only the most seasoned investor or analyst takes the time to fully read and dissect a 10-K. This issue of lack of investor education isn’t the company’s fault; it’s the fault of the investor. Fink is also critical of the legal and governmental infrastructure surrounding the business environment.
“Public officials must adopt policies that will support long-term value creation…First, tax policy too often lacks proper incentives for long-term behavior. With capital gains, for example, one year shouldn’t qualify as a long-term holding period…we need a capital gains regime that rewards long-term investment – with long-term treatment only after three years, and a decreasing tax rate for each year of ownership beyond that (potentially dropping to zero after 10 years).”-Larry Fink
Sure, in this proposed reform the government would receive more taxes in the first three years of a holding. However, potentially dropping capital gains tax to zero at any point would significantly lessen tax revenues in the government. Fink later states that infrastructure should also be addressed. The government can’t address that problem with lesser tax revenues. The letter from Fink to these corporate executives definitely makes a good point. Companies should seek sustainability through long-term value creation. However, there are many issues that are out of the control of Fink, CEO’s, and even the U.S. government. Sorry Mr. Fink, looks like we’ll all just keep looking at the DJIA (Dow Jones Industrial Average) every morning like a casino veteran looking to take his winnings and run.