One of the sorry spectacles of modern life is having prominent individuals who profit from and serve as prime exemplars of major social ills trying to depict themselves as part of the solution, when they haven’t gone through any sort of Damascene conversion o give their virtue-signalling even a thin veneer of legitimacy.
Today’s object lesson is Larry Fink, the Chairman and CEO of the ginormous fund manager BlackRock (not to be confused with the private equity/alternative asset manager Blackstone). BlackRock, with $6.2 trillion under management as of October, 2018, is the largest asset manager in the world,.
Fink became a big cheerleader of sustainability in early 2018, which makes him awfully late to this party; “environment, social, and governance” has been an investment fad for well over a decade. We’ve embedded his 2019 letter letter to CEOs at this end of this post.
One imagines that Fink thinks his missive is forthright, but it doesn’t even register as either a “dare to be great” exhortation or an incisive analysis. Instead, it comes off as a rehash of Davos Man worries, with it all too evident that Fink and his fellow travelers are in comfortable denial about the rot in the foundations of the political and social order.
Fink Is the Last to Lecture; He’s Patient Zero of the Problem
Nowhere does Fink mention the elephant in the room: high levels of income and wealth inequality. Heavens no. All that populist revolt and decline in faith in globalization is due to the great unwashed masses wanting companies to step in because governments haven’t responded adequately. No, I am not making that up. Fink never acknowledges that the sustained war on New Deal safety nets and labor protections, and the resulting rise in insecurity and lack of class mobility are fueling this legitimacy crisis.
Fink can’t afford to acknowledge that he exemplifies the problem. Supersized finance sectors have played a big, direct role in the rise in inequality in advanced economies. These studies have also found that the growth in secondary market trading is particularly unproductive in economic terms. And not to belabor the obvious, but rising levels of pay in finance since the early 1980s have also led to a brain drain, particularly of mathematics and physicians who became “quants”
As Dr. Asbhy Monk pointed out in talk at CalPERS, you are twice as likely to become a billionaire in asset management as you are in tech. While the 1% consists largely of CEOs and their top retainers (such as partners at the toniest law and consulting firms), the top 0.1% consists mainly of private equity and hedge fund heavyweights. Fink, a billionaire is a member of the 0.1% club.
Nor is Fink a credible party to tell other CEOs how to behave. He’s been one of the 25 most overpaid CEOs. It should come as no surprise that BlackRock is also less likely than other large fund managers to vote against CEO pay packages. Can’t risk alienating prospects for 401(k) mandates, now can we?
The New Corporate Salvation: “Purpose”
The big theme of Fink’s letter is that companies need to put “purpose” first. He’s very late to this party too. We wrote back in 2007 of Financial Times writer John Kay’s discussion of the idea of obliquity, that in complex systems, it is actually counterproductive to try to pursue goals directly, because the environment is too complicated to be able to map a straight path. One of the implications is that companies that focus on profits don’t wind up being the most profitable in their industry: the one with loftier goals do better.
The wee problem with Fink’s exhortation for those businesses that fetishized maximizing shareholder value to start focusing on nobler aims is that it is very hard to change the culture of large organizations, short of a replacing lots of people at the top. And that sort of shakeup pretty much never happens save as a result of a major crisis.
Fink contends that companies will have to take the demand of millennials that companies put improving society over generating profit. However, given that these same millennials are perfectly happy to work for elite (Google and Facebook) and not-so-elite companies that are putting more and more surveillance technology in place, and are all too happy to give personal data away (DNA???? What are you thinking?), the days of millennial uppity-ness are likely to be short lived.
A Bit Too Obvious that Fink Is Talking His Book
Larry, a pro tip: if you are going to pretend to offer advice, it has to be credible. This isn’t:
Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.
This is true only by by “society” he means the old money 400 families sort. Everyone else who has been paying attention has noticed that the compensation for CEOs and top executives has kept rising relentlessly, while they pay of ordinary people has languished and their jobs have become less secure. And no one on the wrong side of this trade is going as a supplicant to “companies” and plead with them to do better. Laborers got safer working conditions and eventually shorter workweeks and better pay only after years of struggle that included killing of labor leaders, and even then, those gains were solidified for a few decades primarily to hold Communism at bay.
The reason that Bernie Sanders is the most popular politician in the US and that Alexandria Ocasio-Cortez has caught on like a house on fire is that they have put economic inequality and injustice at the center of their agendas, and American are hungry for the types of change they are advocating. More female and minority board members means squat to American who are living paycheck to paycheck.
A plausible pitch would have gone more like: “The pitchforks are coming,. You can either remain a target or figure out what you need to do to have your leadership group look less like out-of-touch greedheads.” But I doubt that Fink will be in the vanguard of business leaders arguing for the need to give up excesses like corporate jets.
Another tell that the times that the word “sustainable” appears in Fink’s letter, it refers to financial performance, not to sustainability as it is usually used in the wider world, for needing to work within planetary resource limits. But if Fink were to be at all candid on this front, he’d have to admit that huge swathe of investee companies should be radically downsized or liquidated, such as oil and gas exploration and development companies, airlines, fast fashion companies, and plastics makers like Dow Chemical. And then we have other companies that are negative value added societally, such as health insurers and banks. Recall that the Bank of England’s Andrew Haldane, in a 2010 back of the envelope estimate of the GDP cost of the crisis that proved to be accurate, ascertained that banks could not begin to pay for the damage they did. In other words, a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.
But a more obvious howler is Fink’s discussion of how companies have to help with retirement:
Retirement, in particular, is an area where companies must reestablish their traditional leadership role. For much of the 20th Century, it was an element of the social compact in many countries that employers had a responsibility to help workers navigate retirement. In some countries, particularly the United States, the shift to defined contribution plans changed the structure of that responsibility, leaving too many workers unprepared. And nearly all countries are confronting greater longevity and how to pay for it. This lack of preparedness for retirement is fueling enormous anxiety and fear, undermining productivity in the workplace and amplifying populism in the political sphere.
In response, companies must embrace a greater responsibility to help workers navigate retirement, lending their expertise and capacity for innovation to solve this immense global challenge. In doing so, companies will create not just a more stable and engaged workforce, but also a more economically secure population in the places where they operate.
Fink can’t possibly admit that the “save in financial assets” model for retirement cannot possibly work, particularly in a backdrop where advanced economies desperately need to reduce their populations as part of a program to curb resource demands. The old model the US had for saving for retirement was the 30 year mortgage. Men (it was then almost entirely men) got jobs that would last 20+ years. Paying down the mortgage was forced savings. The house would become mortgage-free around the time of retirement, lowering household costs when income dropped.
The compound interest magic that made Warren Buffett rich depends on corporate profit growth and/or falling interest rates. In aggregate corporate profit growth depends on population growth and productivity growth. Labor is the biggest input cost for goods and obviously for services, so productivity growth generally speaking will reduce the amount of labor. When workers had more bargaining power, the benefits of productivity gains were once split between profits and wage increases, but those days ended in the mid-1970s.
Or to put it another way, trees can’t grow to the sky. The US is already at a record high level of profit share to GDP. Corporations have been the biggest buyers of stocks in the US for years and that has to slow down due to debt levels and rising interest rates making that game less attractive than it used to be.
You don’t have to look hard to see that valuation of financial assets are attenuated, and with central banks determined over time to get back to more normal interest rates, it’s not as if there’s good reason to expect the financial markets to be a friendly setting for the next few years.
Michael Hudson has documented how in Bronze Age societies that excessive financial burdens, in the form of debt, were periodically wiped clean in jubilees. We don’t have such enlightened approaches for pro-actively cancelling or cutting dysfunctional financial claims. We instead have financial crises or wars or revolutions do the trick.
The best approach to retirement would be a more generous Social Security system plus single payer, so that older people don’t have to worry about Medicaid crapification like joining a HMO or drug plans and so everyone gets the benefit of limiting drug price increases and getting rid of costly middlemen. You’ll notice that Fink said squat about companies needing to do their bit to help with retirement by halting discrimination against older workers. Creating more opportunities for those who want to work to keep working would do a good deal to reduce retirement insecurity.
So Fink is yet another one of those squillionaires who doesn’t get that his patter has a Versailles circa 1788 feel to it. But at least his version is bland and conventional. He could be trying to pitch some technology snake oil instead.00 Larry Fink's Letter to CEOs | BlackRock