In February 2016 the CEO of BlackRock Inc., the world’s largest investment management company, sent a provocative letter to the chief executive officers of the S&P 500 and large European corporations. In that letter he urged them to figure out how to endow their companies’ future through investing in long- term, value- creating innovation, and to be transparent about it. Investors and, indeed, economies, need something more than short- term stock price bumps, he claimed, in order to build a strong foundation for society. And, he continued, if given the compelling vision of companies’ strategic intent, short- term financial deviations will be better tolerated by the investor markets. I quote parts of his letter here for your convenience:
“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. Dividends paid out by S&P 500 companies in 2015 amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months.”
“We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment. We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation.
“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.
“We recognize that companies operate in fluid environments and face a challenging mix of external dynamics. Given the right context, long-term shareholders will understand, and even expect, that you will need to pivot in response to the changing environments you are navigating. 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.. . . .
“Over time, as companies do a better job laying out their long-term growth frameworks, the need diminishes for quarterly EPS guidance, and we would urge companies to move away from providing it. Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need.”
The letter continues on to address other issues, but this excerpt is our focus. The letter has generated many cynical comments and much debate, but to me it represents a clarion call. A key leader in the finance community; —a community that has often been considered the bane of innovation’s existence, is calling for companies to invest in innovation that may take a while to recover. .breakthrough innovation. Now it’s up to companies to respond, and to do so, they must develop a capability for strategic innovation. It must become part of the fabric of large, established companies.
The immediate after effect of Mr. Fink’s letter was exciting. A group of leaders of large companies formed the American Prosperity Project, under the auspices of the Aspen Institute, to draft policies that would set American government and business on a course against short termism.
Then they went radio silent. I thought nothing was happening. But I was wrong.
In January of this year, bloggers reported progress, at least on paper. The members of the American Prosperity project issued a paper in which they offer a framework of corporate tax reform and corporate governance reform to discourage short termism.
Who are those members? The CEO of Unilever. The CEO of Levi Strauss. The CEO of Pfizer. The head of the AFL-CIO. Board directors of companies like Wendy’s and Henry Schein. These are multi-billion dollar organizations who are generations old. They are not family run enterprises.
So, let’s see what happens next. It needs to happen fast. The Dow/DuPont merger and subsequent plans to break up into three companies provides one example of the need for urgency. How will that treasure trove of R&D be stewarded? Who bears responsibility for commercializing it? The jury is out.
Is Larry Fink holding company leaders accountable for acts of short termism???
A few weeks ago I received a call from a person in a well-known pharmaceutical company who had just been given the mandate to build an innovation capability that moved them ‘beyond the core.” He was shocked at the similarities in what I described from our research and his own experience, and realized that…as mentioned in my last post…that we know more than we realize about building a capability for breakthrough innovation. We suggested some next steps in working together to help him, because he was starting from scratch without a compass to guide him.
Within a few weeks he let us know that his supervisors were reluctant to engage. It was “too ‘heavy’ for where his company’s leaders are at, given the internal skepticism on how many successes there really are in the corporate world.”
We have a long way to go to put knowledge into action. I hope Larry Fink redirects his investments, and the American Prosperity Project starts a lobby soon.