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As CFOs I think we should have a voice and a hand at this.....

I thought this would be a good read and discussion. As CFOs this is our realm and we can influence this. Please share your thoughts! On Tuesday morning, the chief executives of 500 of the nation’s largest companies will receive a letter in the mail that will most likely surprise them. The sender of the letter is Laurence D. Fink, chief executive of BlackRock, the largest asset manager in the world. Mr. Fink oversees more than $4 trillion — that’s trillion with a “t” — of investments, making him perhaps the world’s most important shareholder. He is planning to tell the leaders that too many of them have been trying to return money to investors through so-called shareholder-friendly steps like paying dividends and buying back stock.

To Mr. Fink, these maneuvers, often done under pressure from activist investors, are harming the long-term creation of value and may be doing companies and their investors a disservice, despite the increases in stock prices that have often been the result. “The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Mr. Fink writes in the letter. He says that such moves were being done at the expense of investing in “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”

At a time when most investors are clamoring — and applauding — high dividends and bigger buybacks, Mr. Fink is bucking the trend. United States companies spent nearly $1 trillion last year on stock repurchases and dividends, and virtually every big American company is engaged in these practices. General Electric announced last week that it would buy back $50 billion of its stock after selling most of GE Capital. Apple authorized a $90 billion buyback of its own stock last year. Exxon Mobil spent $13 billion last year on its own stock. IBM, which I’ve questioned for its aggressive use of buybacks and dividends, has spent $108 billion buying back its own shares since 2000.

Rather than consider the return of all this money to shareholders positively, Mr. Fink says the move “sends a discouraging message about a company’s ability to use its resources wisely and develop a coherent plan to create value over the long term.” Moreover, he argues that “with interest rates approaching zero, returning excessive amounts of capital to investors” isn’t helpful because they “will enjoy comparatively meager benefits from it in this environment.” Mr. Fink and I have been discussing — and debating — this topic for more than a year. Last week, before mailing his letter, which he writes annually, he shared it with me. “I feel the same pressures as other C.E.O.s,” he told me. But he suggested that it’s not just the fault of managements for being so shortsighted — the investors themselves may be the problem. “Investors need to focus on long-term strategies and long-term outcomes,” Mr. Fink said, suggesting we’re currently living in a “gambling society.”

Mr. Fink has a novel suggestion for encouraging shareholders to take a broader perspective, but it may very well upset his peers on Wall Street. He recommends that gains on investments held for less than three years be taxed as ordinary income, not at the usually lower long-term capital gains rate, which now applies after one year. “We believe that U.S. tax policy, as it stands, incentivizes short-term behavior,” he writes in his letter. “Since when was one year considered a long-term investment? A more effective structure would be to grant long-term treatment only after three years, and then to decrease the tax rate for each year of ownership beyond that, potentially dropping to zero after 10 years.” Mr. Fink contends that such a shift in tax policy “would create a profound incentive for more long-term holdings and could be designed to be revenue neutral.

In short, tax reform that promotes long-term investment will benefit both the companies who rely on capital markets and the hundreds of millions of people saving for retirement.” Asked whether such a change in tax policy would reduce liquidity in the market, Mr. Fink scoffed: “I don’t think Warren Buffett cares about liquidity that much.” It is refreshing to see a finance executive talk some sense on these issues. However, Mr. Fink is not simply being altruistic. To some degree, he is talking his own book: BlackRock’s business model, unlike those of so many finance companies that rely on trading fees, does not require it to turn over its portfolio.

Given its size and scale, BlackRock often holds its investments for decades. So from a financial perspective, Mr. Fink has little to lose. In fact, the firm may have much to gain if tax rules were adjusted to be more favorable to the way Mr. Fink invests. (And what’s the harm in suggesting tax policy change, as smart as it may be, that has a low probability of ever happening?)

That’s not to suggest Mr. Fink doesn’t believe what he’s saying; he does. He is a relatively progressive finance executive who has been a longtime Democrat and has taken positions that many of his peers in finance abhor. To Mr. Fink, the shortsightedness that pervades corporate America is just a symptom of a larger issue. “This is not just a corporate problem,” he said. “It’s a societal problem, whether it’s health care or politics or business.” He also said he recognized that his letter might not be popular in certain quarters but he qualified his approach by saying, “I’m not trying to make friends or enemies.” Despite his protestations, Mr. Fink said, “There is nothing inherently wrong with returning capital to shareholders in a measured fashion.” He added, “Nor are the demands of activists necessarily at odds with the interests of other shareholders.” But it’s when it is taken to extremes — such as it seems to be in the current marketplace — that has Mr. Fink concerned.

Still, Mr. Fink is taking a direct shot at the rise of activist investors, like Carl C. Icahn, who have made careers out of pressing companies to return cash to shareholders. Mr. Fink said he met with two activists last week. One of them, he said, told him, “You hate me, don’t you?” “No, I don’t hate you,” Mr. Fink said he replied. “I’m just trying to get some balance.”


Ern Miller
Title: Co-CEO
Company: Miller Small Business Solutions
(Co-CEO, Miller Small Business Solutions) |

Any CEO who thinks the investors can be treated poorly should be canned. He might be good at what he does, but he is indicating that he is discouraging investment. I could not decipher his motivations, but, it sounds like he is wanting to lower the share price.

Rising share prices are the life blood of a company. Once a share price drops, it is near impossible to recover.

A reason a share price drops might be because the company has loads of cash in reserve, and hopes to buy back some of the shares. Look to see the investment structure of a CEO. Is he investing further when he takes action that could potentially lower a share value? I doubt it. Unless he is making a play to have the company buy back shares, and expects his investment will recover, but keeps him out of suspicion of market manipulation.

The caveat is, some companies have lost sight of what the value of investors is and overcompensate, and that might be the jist of this article, but only mentioned further than I got. My personal experience has been that the companies I invest in do as minimal as possible within the limits of the SEC for share holders.

And that is how I want it. I invest in a company for return on my investment. Send me my share of the money and let me do with it as I desire rather than buying me over-priced useless trinkets or lavish investor parties.

The balance is key, but don't sound as though you hate the investor when you encourage balance. Sure, the current investors will understand, but harsh talk chases away your new investors.


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