TheCorporateCounsel.net

You can imagine that Larry Fink, the co-founder, Chair & CEO of the world’s largest asset manager, sat down 6 weeks ago to start outlining his letter to shareholders and vetting everything through the appropriate channels. There were plenty of important issues to cover – the net zero transition, human capital, inflation. Then Russia invaded Ukraine. Governments and private companies are cutting ties, the world order has been upended, we’re witnessing a massive humanitarian crisis, and BlackRock had to make some key recalculations & decisions in a very uncertain regulatory environment – including how to handle portfolios with Russian securities. BlackRock’s success & shareholder returns are very much tied to macroeconomic conditions.

The letter to shareholders that was posted yesterday (and filed in multiple formats on Edgar as additional soliciting material) is remarkably responsive to these recent developments, in line with the speed at which many companies took action. Larry Fink says that the way things are playing out reinforces BlackRock’s approach to using capitalism for good:

These actions taken by the private sector demonstrate the power of the capital markets: how the markets can provide capital to those who constructively work within the system and how quickly they can deny it to those who operate outside of it. Russia has been essentially cut off from global capital markets, demonstrating the commitment of major companies to operate consistent with core values. This “economic war” shows what we can achieve when companies, supported by their stakeholders, come together in the face of violence and aggression.

He goes on to say that supply chains and the inflationary impact will become even more important:

Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints – something that Covid had already spurred many to start doing.

And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. Others – like Mexico, Brazil, the United States, or manufacturing hubs in Southeast Asia – could stand to benefit. This decoupling will inevitably create challenges for companies, including higher costs and margin pressures. While companies’ and consumers’ balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary.

I admit I was surprised to not find anything in this letter about cybersecurity or disinformation, or any specific references to China. But those topics aside, it does have something for almost everyone – which makes sense, given the wide-ranging fallout of this war and the many issues that BlackRock and its portfolio companies are dealing with. On crypto:

Finally, a less discussed aspect of the war is its potential impact on accelerating digital currencies. … As we see increasing interest from our clients, BlackRock is studying digital currencies, stablecoins and the underlying technologies to understand how they can help us serve our clients.

On the net-zero transition:

Longer-term, I believe that recent events will actually accelerate the shift toward greener sources of energy in many parts of the world. During the pandemic, we saw how a crisis can act as a catalyst for innovation. Businesses, governments, and scientists came together to develop and deploy vaccines at scale in record time.

To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas will be important as a transition fuel. BlackRock’s investments – including one late last year – on behalf of our clients in natural gas pipelines in the Middle East are a great example of helping countries go from dark brown to lighter brown as these Gulf nations use less oil for power production and substitute it with a cleaner base fuel like natural gas.

On client-directed voting:

Much like asset allocation and portfolio construction, where some clients take an active role while others outsource these decisions to us, different clients are interested in different levels of involvement when it comes to casting proxy votes. After talking with our clients, we used new technology and other innovations to offer proxy voting choice. This is now available to institutional clients representing just over $2 trillion of index equity assets, including public pension funds serving over 60 million people. We see this as just a first step. Our ambition over time is to continue developing new technologies and working with industry partners to expand voting choice for even more clients.

On board oversight of strategy and recent downturns in performance, slotted in to the mid-section of the letter:

Our strategy, which we regularly review with our Board of Directors, remains rooted in our commitment to serving clients over the long term. We will: keep alpha at the heart of BlackRock; accelerate growth in iShares, private markets, and Aladdin; deliver whole portfolio advice and solutions to our clients and be the global leader in sustainable investing. Successful execution of this strategy will enable us to continue delivering industry-leading organic growth and generate value for our shareholders over the long term.

On BlackRock’s attention to internal human capital issues:

At the same time, we recognize the pandemic has redefined the relationship between employers and employees. To retain and attract best-in-class diverse talent, we need to maintain the flexibility of working from home at least part of the time. And our Aladdin technology has given us the flexibility to quickly pivot our operating model over these past two years, which will continue to be important given the uncertainty of the pandemic and the threat of new variants emerging.

We also remain focused on investing in our employees’ experience with BlackRock in other important ways: improving training and development, expanding mental health services and other benefits, and continuing to advance diversity, equity and inclusion (DEI) to make sure we’re broadening representation across the firm and cultivating an inclusive culture.

On Board composition:

We also give careful consideration to the composition of our Board to ensure it is positioned to be successful over the long term. We are committed to evolving our Board over time to reflect the breadth of our global business and look for directors with a diverse mix of experience and qualifications. We will continue to introduce fresh perspectives and make diversity in gender, race, ethnicity, nationality, age, career experience and expertise, as well as diversity of mind, a priority when considering director candidates.

In times of crisis, many companies take the very reasonable approach of saying that they’re monitoring events and will respond accordingly. What’s impressive about this particular letter, even though it’s still just words on a page, is that it “shows” rather than “tells.” The level of detail puts to rest any doubts that the board & management are thinking through the evolving situation from all angles, while not losing sight of the core business strategy and commitments. Larry Fink and team didn’t gain $10 trillion in assets under management without being master communicators.

– Liz Dunshee