‘The Powerful Forces of Short-Termism’ (Gwen Moritz Editor’s Note)

Larry Fink

A couple of weeks ago, a dreamy-eyed idealist called on Wall Street to change its ways, to think about the future and the overall economy, not just today’s share price and this quarter’s dividend.

And it wasn’t Bernie Sanders. It was Larry Fink, co-founder and CEO of BlackRock Inc., the largest investor in the world.

Fink, in a four-page letter to the CEOs of companies in which BlackRock has invested its clients’ $4.6 trillion-with-a-t, said he’d been trying for several years to get the chief executives of leading companies to resist “the powerful forces of short-termism afflicting corporate behavior.” He noted the growing portion of earnings being returned as dividends and the widespread popularity of stock buybacks — the very kind of thing one would expect to make an investor’s eyes light up.

Instead, he worried that some of that money might be better used. “We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment,” he wrote.

He also suggested that companies just say no to the “culture of quarterly earnings hysteria” and stop obsessing about “a one-penny deviation from their EPS targets or analyst consensus estimates.” (I recognize both of these as valid criticism of the business press as well.) Instead, Fink asked CEOs and directors to create annual strategic plans and use their quarterly earnings statements to show how they are performing against their own stated goals.

It happens that I read Fink’s letter just a few days after I watched, for the first time in a decade, “Enron: The Smartest Guys in the Room,” the 2005 documentary about the ultimate short-term corporate thinkers. (It’s available on Netflix.) Not only did they literally turn the lights out in California in pursuit of short-term revenue to prop up their stock prices (and options, of course), those smart guys at Enron didn’t think anyone would ever figure out that revenue that had to be paid back was actually a loan, not a sale.

Having that fresh in my mind, then, created an even sharper contrast when I read Fink’s words encouraging CEOs to set their own goals and drive their own companies toward those goals at the pace that makes the most sense for long-term health and stability. And he encouraged directors to link executive compensation to metrics “that support a framework for long-term growth.”

Paying executives to think long term — what a concept!

If I’m not reading too much into it, he scolded the CEOs for their own role in creating the treadmill on which they and their companies are trapped.

“[O]ne 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,” Fink wrote. And later: “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.”

I wonder how many boards of directors will find a discussion on whether to issue future guidance on the agendas of their next meetings. Especially since behind the attractive carrot of a more deliberate, less frenetic approach to corporate earnings, Fink also wielded a little stick: The threat of opposing managers in proxy fights with activist investors who offer better long-term strategies. (Indeed, BlackRock voted with activists in seven of the 18 largest proxy fights last year.)

There are certainly arbitrageurs and churners for whom a quick profit is more important than the long-range health of a corporation, but Fink says most of BlackRock’s clients “are saving for retirement and other long-term goals.” I think that describes most investors, BlackRock clients or not.

Short-termism, of course, isn’t just a problem for Wall Street. Private companies don’t have those analyst estimates to contend with, but anyone can let the urgent distract from the important, as the preacher says. Government, responding to the short attention span of the electorate, is similarly short-sighted. Bernie Sanders would still be an obscure New England senator if young Americans weren’t truly angry about the kind of short-term thinking that has forced them to spend decades paying for the college degrees that their grandparents could pay for with summer jobs.

And short-termism is rampant in families. Big houses and underfunded retirement accounts. Expensive cars for teenagers, but no college savings. Fabulous vacations, but no emergency fund.

Maybe we need Larry Fink to give us all permission to start thinking long term.

Gwen Moritz is editor of Arkansas Business. Email her at GMoritz@ABPG.com.