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Wednesday, April 15, 2015

Fink the Lightning Rod Vs. Our Gambling Society

News summary by MFWire's editors

Larry Fink leads the largest asset manager in the world, and he has used that spot to gain a big microphone when it comes to the world of economics, finance, and even public policy. The BlackRock [profile] chief can be a lightning rod in a way that few others in the mutual fund and broader asset management businesses could ever dream of rivaling.

He's taken up that lightning rod mantle yet again. Last week Fink wrote a letter to the CEOs of companies in the S&P 500 Index, a letter they would reportedly receive yesterday. [Business Insider posted the full text of the letter.] He calls on his fellow CEOs to fight back against short-termism, against those activist shareholders and others who focus on quarterly earnings and boosting share buybacks and dividends right now while sacrificing longer-term gains.

Andrew Ross Sorkin of the New York Times reported on the letter Monday night, and Reuters and a host of others followed suit.

In terms of specific ideas, Fink called for a change in the U.S. tax code. He wants the definition of "long-term investments" to be be redefined as being held for at least three years, from the current one-year definition, to thus expand the scope of short-term investments that are counted as short-term for tax purposes and thus taxed at regular income tax rates rather than capital gains rates (typically lower) used for long-term investments.

Fink tells the Times that he sees investors as living in a "gambling society," and in his letter he lays out a forceful attack activist investors he sees as being too short-term in their outlook:

... [C]orporate leaders' duty of care and loyalty is not to every investor or trader who owns their companies' shares at any moment in time, but to the company and its long-term owners. Successfully fulfilling that duty requires that corporate leaders engage with a company's long-term providers of capital; that they resist the pressure of short-term shareholders to extract value from the company if it would compromise value creation for long-term owners; and, most importantly, that they clearly and effectively articulate their strategy for sustainable long-term growth.

The debate over Fink's words and tax reform proposal (which the Times sees as having "a low probability of ever happening") is spreading. Haverford Trust Co chief investment officer Hank Smith defends activist investors, singing praises (to Reuters) of Nelson Peltz of Trian Fund Management (the biggest shareholder of Legg Mason) as "a positive influence" and insisting that today's activist investors "are not going into this slash and burn."

On the flip side, star bond fund PM and Loomis Sayles [profile] vice chairman Dan Fuss comes down on Fink's side, telling Reuters that "there's too much catering to quarterly earnings engineering slash activist shareholders." 

Edited by: Neil Anderson, Managing Editor

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