The world's largest asset manager wants major companies to spend less on share buybacks and more on capital investments that will spur long-term growth.
In his annual corporate governance letter, sent to chief executive officers of major global companies, BlackRock Inc. chief executive officer Larry Fink said he supports returning excess capital to shareholders, but said companies have been engaging in share buybacks "at a furious pace."
Mr. Fink said the value of dividends and share buybacks for companies in the S&P 500 index exceeded the value of total operating profit during the 12 months ending in the third quarter of 2016. Companies use share buybacks to reduce the number of their outstanding shares, which helps raise the share price for all remaining investors.
"While we certainly support returning excess capital to shareholders, we believe companies must balance those practices with investment in future growth," he said. "Companies should engage in buybacks only when they are confident that the return on those buybacks will ultimately exceed the cost of capital and the long-term returns of investing in future growth."
BlackRock is the world's largest investment organization with over $5-trillion (U.S.) in assets under management, giving weight to Mr. Fink's corporate governance pronouncements.
Mr. Fink's letter for 2017 continues to espouse his continuing campaign against "short-termism," urging companies to take a longer-term approach to investment and planning, and to tie executive compensation to longer-term growth.
In his letter, Mr. Fink warned that BlackRock will carefully watch how U.S. companies use money they are expected to bring into the country under a cash repatriation policy promised by President Donald Trump.
"Will it be used simply for more share buybacks?" he said. "Or is it part of a capital plan that appropriately balances returning capital to shareholders with prudently investing for future growth?"
Mr. Fink's letter also talked about the growing backlash against globalization over the past 12 months. While saying he remains a firm believer in the overall benefits of globalization, Mr. Fink said there is little doubt that globalization's benefits "have been shared unequally, disproportionately benefiting more highly-skilled workers, especially those in urban areas."
He said BlackRock will engage with companies in 2017 to see how their strategic plans address the impacts of the past year's changes in the global economic environment, and how companies plan to pivot, if necessary, in light of "the new world" they now operate within.
BlackRock is advocating for tax reform, Mr. Fink added, urging the U.S. government to change the capital-gains tax system to reward investors who hold their shares over the long term. Investors currently pay a lower capital-gains tax rate on investments held for more than one year, but Mr. Fink said the time frame should be lengthened to a minimum of three years and the tax rate should decrease further for each year of ownership beyond that.
Mr. Fink's letter also paid a nod to the Canada Pension Plan, urging CEOs to lend their voices to develop a more secure retirement system in the U.S. for all workers, including millions who have no workplace pension plans.
"The retirement crisis is not an intractable problem," he said. "We have a wealth of tools at our disposal: auto-enrollment and auto-escalation, pooled plans for small businesses, and potentially even a mandatory contribution model like Canada's or Australia's."
He added companies also have a role to play in improving financial literacy in their work forces to help improve retirement outcomes, and said asset managers should also help with financial literacy, but have done a poor job to date.
"If we are going to solve the retirement crisis – and help workers adjust to a globalized world – businesses need to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security."