Mumbai Capital

Heresy on Wall Street: Look past the quarter

Laurence D Fink, co-founder and chief executive of BlackRock, sent a letter to 500 chief executives late on Monday urging them for the first time to stop providing quarterly earnings estimates. — file photo: AP  

Most money managers clamour for companies to provide detailed guidance on their next quarter, down to the penny — but not the world’s largest investor.

Laurence D Fink, co-founder and chief executive of BlackRock, which with more than $4.6 trillion in assets under management makes it the world’s largest investor, sent a letter to 500 chief executives late on Monday urging them for the first time to stop providing quarterly earnings estimates.

“Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need,” Fink wrote.

The proposal, a provocative recommendation from the influential Wall Street executive, is aimed at trying to curb companies’ short-term focus on quarterly results.

“To be clear, we do believe companies should still report quarterly results — long-termism should not be a substitute for transparency,” he said. “But CEOs should be more focused in these reports on demonstrating progress against their strategic plans than a one-penny deviation from their EPS (earnings per share) targets or analyst consensus estimates.”

Fink has made a series of proposals over the last several years to encourage longer-term thinking by companies, including a plan to change the tax code and the treatment of capital gains. But his latest proposition goes further than his previous efforts.

While Fink wants to eliminate quarterly guidance, he is also making perhaps an even more controversial request, asking chief executives and company boards to provide a ‘a strategic framework for long-term value creation’ that could extend to multiple years.

In other words, a company should give shareholders a detailed long-term plan for its business.

“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,” Fink wrote. Without management providing a road map for the next few years, he said, “Some short-term investors (and analysts) offer more compelling visions for companies than the companies themselves, allowing these perspectives to fill the void and build support for potentially destabilising actions.”

Activist investors are increasingly pressuring companies to return money to shareholders or buy back shares. Last year through the end of the third quarter, according to Fink, buybacks skyrocketed 27 per cent over the previous year, which itself had been a record. Companies that buy back shares reduce the amount of stock they have outstanding, a move that can have the effect of increasing earnings per share and the stakes of existing shareholders.

Fink’s call comes at a time of stepped-up chatter among big investors and other business leaders to try to encourage companies and investors to be less focused on short-term efforts to lift earnings. Critics of buybacks question whether the purchases are a productive use of profits rather than investing in their businesses and creating jobs. BlackRock, along with other mutual fund giants like Fidelity Investments and T Rowe Price, recently held a meeting with Warren E Buffett at the invitation of JPMorgan Chase’s chief executive, Jamie Dimon, to devise a series of voluntary standards that companies should adopt, according to people briefed on the meetings. Another meeting is planned for next month. The discussion of short-termism on Wall Street has also become part of the presidential campaign. Hillary Clinton made a policy speech last year that endorsed many of the ideas Fink had raised. There has long been speculation that Fink could eventually land a senior government post in Washington.

In an interview, Fink said he wrote this letter now to get ahead of proxy season, a period during the spring when many companies hold their annual meetings and vote on shareholder resolutions. He hopes to influence how chief executives discuss their companies’ performance and goals in their annual letters to shareholders.

Of course, some companies in fast-moving businesses like technology might argue that it is impossible to present a multiyear road map without telegraphing plans to rivals.

Fink dismissed that possibility. “I don’t think a public discourse on how a company’s CEO sees their position is going to result in proprietary secrets being revealed.” — New York Times News Service

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Printable version | Dec 6, 2020 4:46:37 AM | https://www.thehindu.com/news/cities/mumbai/business/heresy-on-wall-street-look-past-the-quarter/article8186557.ece

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