Pat McHugh in Agenda Week on Larry Fink’s Recent Letter to CEOs
Large Investors Will Not Stand for Short-Termism
BlackRock CEO Larry Fink’s recent letter to the CEOs of the S&P 500 and other large companies around the world was a wake-up call for many corporate boards and activist investors. Large investors like BlackRock will not sit idly as others focus on short-term stock-boosting measures like buybacks, dividends and meeting quarterly earnings estimates, especially when there is no clearly articulated strategy for long-term growth.
While big institutions like BlackRock, with $4.65 trillion in assets, have never been complacent, the letter makes clear that the firm is more engaged than ever in the voting process.
As a result, the outcome of corporate elections will be less predictable, and, in turn, shareholder votes will be more difficult to obtain in all types of situations ranging from mergers and spin-offs to contested activist situations.
One of the most important sections of Fink’s letter is a message to company management that BlackRock’s support will not be easy to come by in cases “where management has not articulated a clear long-term vision, strategic direction and credible metrics against which to assess performance.” In other words, companies can’t rest on the value they’ve created in the past; they have to communicate a clear vision for the future.
Other large institutional investors have made similar calls. This new reality played out in several recent contested corporate elections, but nowhere more starkly than in the one at Darden Restaurants last year. In that campaign, as proxy solicitor for Starboard Value, we heard from shareholders who were frustrated at the company’s lack of long-term strategy and inspired by Starboard Value’s plan to create value by rejuvenating the company’s brands, such as Olive Garden, among other measures. In the end, Starboard Value led the push to replace the entire board of Darden.
The success of activist investors like Starboard Value in shaking up corporate boardrooms has even led to a recent memo from legendary Wall Street lawyer Martin Lipton, famous for devising the poison pill takeover defense. Lipton wrote that companies should give “careful consideration” to adopting activist ideas that “are not unreasonable” and putting a “respected activist” on the board in a settlement.
The memo was in response to a recent recommendation from Institutional Shareholder Services (ISS) that said shareholders of DuPont should consider electing activist investor Nelson Peltz to the board.
While the ISS decision shocked some, it reflects the current state of activist investing, in which nearly three quarters of all campaigns were successful last year.
Further shaking up the landscape of corporate elections, the SEC issued guidance last year on the use of proxy advisory firms like ISS and Glass Lewis. The guidance made clear that investment advisors, such as mutual funds and ETFs, don’t always have to vote in elections in order to fulfill their fiduciary duties to their shareholders. Fewer large shareholders will blindly follow the recommendations of proxy advisory firms, making voting patterns even less predictable.
These developments in corporate elections and shareholder activism, including Fink’s letter, make it much more important for boards to evaluate the shareholder base and communicate clearly with investors.
Understanding which shareholders are likely to vote and what issues they care about is now crucial to winning a proxy campaign. Some activist investors may now have to evaluate more closely whether they go after a certain target based on the makeup of the shareholder base and how those shareholders are likely to vote. To ensure they aren’t ripe for an activist investor, public companies need to be in constant contact with their largest shareholders to communicate corporate strategy and understand what governance issues concern their investors.
More importantly, activists and companies need to have a vision for the future that investors can understand and buy into. Spin-offs, buybacks and dividends will garner some votes, but they may not convince big investors like BlackRock unless there’s a strategy behind it.