Larry Fink’s 2024 Annual Chairman’s Letter to Investors

Larry Fink is Founder, Chairman and CEO of BlackRock Inc. This post is based on Mr. Fink’s annual letter to investors.

Time to rethink retirement

When my mom passed away in 2012, my dad started to decline quickly, and my brother and I had to go through my parents’ bills and finances.

Both my mom and dad worked great jobs for 50 years, but they were never in the top tax bracket. My mom taught English at the local state college (Cal Northridge), and my dad owned a shoe store.

I don’t know exactly how much they made every year, but in today’s dollars, it was probably not more than $150,000 as a couple. So, my brother and I were surprised when we saw the size of our parents’ retirement savings. It was an order of magnitude bigger than you’d expect for a couple making their income. And when we finished going over their estate, we learned why: My parents’ investments.

My dad had always been an enthusiastic investor. He encouraged me to buy my first stock (the DuPont chemical company) as a teenager. My dad invested because he knew that whatever money he put in the bond or stock markets would likely grow faster than in the bank. And he was right.

I went back and did the math. If my parents had $1,000 to invest in 1960, and they put that money in the S&P 500, then by the time they’d reached retirement age in 1990, the $1,000 would be worth nearly $20,000.[1] That’s more than double what they would have earned if they’d just put the money in a bank account. My dad passed away a few months after my mom, in his late 80s. But both my parents could have lived beyond 100 and comfortably afforded it.

Why am I writing about my parents? Because going over their finances showed me something about my own career in finance. I had been working at BlackRock for almost 25 years by the time I lost my mom and dad, but the experience reminded me — in a new and very personal way — why my business partners and I founded BlackRock in the first place.

Obviously, we were ambitious entrepreneurs, and we wanted to build a big, successful company. But we also wanted to help people retire like my parents did. That’s why we started an asset manager — a company that helps people invest in the capital markets — because we believed participating in those markets was going to be crucial for people who wanted to retire comfortably and financially secure.

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Disagreement with ISS concerning activist investor Nelson Peltz

Jeffrey Sonnenfeld is Senior Associate Dean for Leadership Studies and Lester Crown Professor in the Practice of Management, and Steven Tian is Research Director of the Yale Chief Executive Leadership Institute at the Yale School of Management. This post was prepared for the Forum by Professor Sonnenfeld and Mr. Tian. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) and Dancing with Activists (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

Fred Allen once described the media business with the quip, “imitation is the sincerest form of….television”. But ISS, The New York Times, and other cheerleaders of Nelson Peltz/Trian Partners’ activist campaign challenging Disney CEO Bob Iger all seem to miss that Iger towers over his media peers in genuine financial performance, in stark contrast to his underperforming activist challengers. It is a veritable tale of two cities in measuring up the financial track record of Bob Iger against Nelson Peltz.

Of course, the question of both Bob Iger and Nelson Peltz’s financial track records have become a surprisingly contentious area of dispute as the proxy contest nears its grand finale. Both sides have stepped into overdrive, with dozens of glossy 100+ page slide decks and white papers released from all vantage points.

As Disney shareholders begin to cast their ballots on the eve of the Annual Meeting two weeks from now, on April 3rd, it can be hard to separate fact from fiction in comparing the genuine financial track records of Nelson Peltz and Bob Iger. But the factual evidence speaks loud and clear. While Nelson Peltz has a long history of value destruction, Bob Iger’s nearly two decades as Disney CEO has been marked by genuine value creation.

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Governance Recommendations for the United States

Kerrie Waring is CEO, Severine Neervoort is Global Policy Director, and Carol Nolan Drake is Senior Policy Manager at International Corporate Governance Network (ICGN). This post is based on their ICGN memorandum.

The International Corporate Governance Network (“ICGN”) is pleased to publish its Governance Recommendations for the United States (U.S.) at the ICGN Conference, hosted by the International Finance Corporation, in Washington, D.C., from 7-8 March 2024.

Established in 1995, ICGN advances the highest standards of corporate governance and investor stewardship, contributing to successful companies and long-term value creation. Headquartered in London, ICGN’s membership includes investors responsible for assets under management of $77 trillion, based in over 40 countries – 30% of which are based in North America.

The purpose of the ICGN Governance Recommendations is to highlight areas of interests to ICGN Members and to serve as an agenda for dialogue with regulators, standard-setters, and business organisations. The aim is to share international experience on emerging standards and practices related to corporate governance and investor stewardship, and the promotion of well-functioning capital markets.

In developing the recommendations, we have engaged with ICGN Members, particularly institutional investors with globally diversified portfolios. The ICGN Global Governance Principles[1] and ICGN Global Stewardship Principles[2] are referred to as an international benchmark given that they are widely used by ICGN Members in their company assessments and voting decisions, and by regulators when developing corporate governance rules and standards.

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From Moelis to Miller: How to Settle with Activists

Jim Woolery is Founding Partner at Woolery & Co. This post is based on his Woolery & Co. memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists (discussed on the Forum here) and The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

  • The case before Vice Chancellor Travis Laster is Theodore B. Miller, Jr., et al. v. P. Robert
    Bartolo, et al. C.A. No. 2024-0176-JTL [Excerpt Attached]
  • On February 23rd, Vice Chancellor Laster issued his decision in Moelis and warned that an activist settlement agreement which binds the decisions of directors irrespective of future events, specifically with respect to director recommendations and the size of the board/committees, may violate Section 141(a) of the Delaware Code
  • On March 8th, Vice Chancellor Laster further held in the Miller case that Elliott’s substantial use of derivatives in its Crown Castle position, combined with the fact that the Crown settlement agreement was struck prior to the window for shareholder proposals, presents a colorable claim under Unocal

What do Moelis and Miller mean for boards and activists going forward?

A ‘REASONABLE’ APPROACH TO ACTIVIST SETTLEMENT AGREEMENTS

Under Unocal, the response to an activist threat needs to be reasonable and proportional to the threat that the activist presents to the corporation. If unreasonable and disproportionate, the board’s response may be subject to enhanced scrutiny in Delaware.

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COVID-19 Risk Factors and Boilerplate Disclosure

Adam C. Pritchard is Frances & George Skestos Professor of Law at the University of Michigan Law School. This post is based on a working paper by Stephen J. Choi, Mitu Gulati, Xuan Liu, and Professor Pritchard.

* This illustration depicts the widespread adoption of a boilerplate sentence concerning the outbreak of COVID-19 in Wuhan by various firms in their 10-Ks and 10-Qs. The sentence originates with Starbucks’ January 2020 10-Q.

The SEC mandates that public companies assess new information that changes the risks that they face and disclose these if there has been a “material” change. But does this theory work in practice? Or are companies merely copying and repeating the same generic disclosures?

The term “boilerplate,” though widely used, is rarely defined with precision. In the context of risk factor disclosures, we take it to mean a high degree of similarity to what other companies are saying. A related concept here, also commonly used in an imprecise way, is “stickiness.” We use the term to mean that the disclosure in question is not updated, despite changed circumstances.

The COVID-19 pandemic provides a lens through which to examine boilerplate and stickiness in risk disclosures. The pandemic disrupted business along with the rest of society, escalating uncertainty across various industries due to its severity and pervasiveness. Companies worldwide found themselves grappling with a uniform set of challenges, including stagnation in production due to quarantine measures, reductions in consumption, disrupted supply chains, and the looming threat of economic downturn. This unique context raises several questions: How did public companies adjust their disclosure strategies in response to the pandemic? More specifically, in terms of boilerplate and stickiness, which firms moved first to disclose COVID-19 risks? What was the pattern of subsequent disclosures? Did firms copy their COVID-19 risk factor disclosures from others, or did they craft their own tailored disclosures? And finally, as the COVID-19 risk dissipated, who updated their disclosures to reflect diminishing COVID-19 risks?

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Ira M. Millstein tribute

Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and a Co-organizer of the Capital+Constitution project.

“Giant” is the word many would use to describe Ira Millstein as a shaper of modern corporate governance. But the word he preferred for himself was “cricket”, as in the character in the Pinocchio story who sits on a wooden shoulder urging the puppet to behave. In a 2009 email Ira explained “I felt that that [cricket] was always my role with the directors, nagging, but fondly, for them to become people with consciences.”

Ira died at aged 97 on March 13, having devoted his eventful life to guiding corporate directors, CEOs, regulators, lawmakers, and institutional investors toward paths of integrity and accountability. His impact was vast. The New York Times obituary the next day focused mainly on the vital missions he led on behalf of his beloved New York City. But he was an architect of the global capital market as well.

In May 1988, Ira opened a conference at Columbia University inaugurating a new project on institutional investors and corporate governance—the first such venture. He had already advised boards at big companies from his perch at Weil Gotshal & Manges on how to replace cronyism with professional oversight. But Ira had arrived at a powerful insight: the clout of institutional investors was essential to propel market-wide reform. He needed to awaken not just corporate boards, but corporate owners.

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The Rise of “Sell-Side Activism”: Why It’s Happening and How to Respond

Maggie Dean is Vice President of Strategic Situations and Investor Relations, and Hunter Stenback is Executive Vice President at Edelman Smithfield. This post is based on their Edelman memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists (discussed on the Forum here) and The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch.

Most boards and management teams are acutely aware of the threat posed by shareholder activists who often use public letters and media attention to exert pressure on directors and executives. They may be more surprised to hear about an emerging trend: an increase in so-called “sell-side activism” in which a company’s sell-side analysts advocate directly for change.

Historically, the sell-side has parsed earnings reports and executive commentary to update their financial models and apply a valuation multiple to arrive at a “buy,” “sell,” or “hold” recommendation. While their research might identify an underperforming stock and they might change their rating accordingly, sell-siders were typically content to leave advocacy to the shareholders themselves. Sell-siders have also played an important role in facilitating investors’ access to management through the use of roadshows, conferences, and other avenues, and have traditionally sought to maintain positive relationships with management.

Recently though, a growing number of sell-side reports have channeled traditional activist letters, with a clear call to action for management teams and boards. These letters go beyond a traditional “sell” rating, instead advocating for specific, sometimes wholesale, changes at the company. The target companies span a range of market capitalizations, industries, and geographies, and include names like Walgreens, Amazon, and Verisk Analytics. The analysts, meanwhile, represent a mix of bulge bracket and independent firms.

Some analysts have stated that their purpose is to serve as a mouthpiece for investors who have voiced concerns about the company, and to make their own clients aware of common criticisms they are hearing. Others have expressed an interest in advocating for change on behalf of their clients to help the company and stock succeed. No matter the reason, management teams and directors should be paying attention.

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Trading and Shareholder Democracy

Doron Levit is Marion B. Ingersoll Endowed Professor of Finance and Business Economics at the University of Washington Foster School of Business, Nadya Malenko is Professor of Finance at the Boston College Carroll School of Management, and Ernst Maug is Professor of Corporate Finance at the University of Mannheim Business School. This post is based on their article forthcoming in the Journal of Finance. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power and Letting Shareholders Set the Rules both by Lucian A. Bebchuk.

In many advanced economies, regulatory reforms and charter amendments have empowered shareholders of publicly traded firms by enhancing their voting rights. Shareholders not only elect directors, but frequently vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental policies. This shift of power from boards to shareholders assumes that shareholder voting increases shareholder welfare and firm valuations by aligning the preferences of those who make decisions with those for whom decisions are made—a form of “shareholder democracy.”

In our paper, Trading and Shareholder Democracy, published in the Journal of Finance, we question this argument. The corporate setting is very different from the political setting. A key feature of the corporate setting is the existence of a market for shares, which allows investors to choose their ownership stakes based on their preferences and stock prices. Thus, who gets to vote on the firm’s policies is fundamentally linked to voters’ views on how the firm should be run. The goal of our paper is to examine the effectiveness of shareholder voting considering that the shareholder base forms through trading in the stock market.

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New OECD Research on Sustainable Bonds

Caio de Oliveira is the Team Leader for Sustainable Finance, and Adriana De La Cruz and Pietrangelo De Biase are Policy Analysts in the Capital Markets and Financial Institutions Division within the Directorate for Financial and Enterprise Affairs of the Organisation for Economic Co-operation and Development (OECD). This post is based on their OECD memorandum.

The Organisation for Economic Co-operation and Development (OECD) has recently published the first edition of the Global Debt Report, which examines sovereign and corporate bond markets, providing comprehensive and easy-to-understand data analysis into current market conditions and trends. This post builds on the analysis in the report’s third chapter on sustainable bonds, proposing questions policy makers and regulators may want to reflect on globally.

Sustainable bonds can be classified into two major categories. “Use of proceeds bonds” are bonds whose proceeds should be used to either partially or fully finance new or re-finance concluded eligible green, social or sustainable projects. “Sustainability-linked bonds” (SLBs) are bonds for which the issuer’s financing costs or other characteristics of the bond can vary depending on whether the issuer meets specific sustainability performance targets within a timeline but whose proceeds do not need to be invested in projects with an expected positive environmental or social impact.

The sustainable bond market has grown substantially since its emergence in the last decade. At the end of 2023, the outstanding amount of sustainable bonds issued by the corporate and the official sectors totalled USD 2.3 trillion and USD 2.0 trillion (the latter category includes national and subnational governments and their agencies, as well as multilateral institutions). The total amount issued through sustainable bonds in the corporate and official sectors was six and seven times larger in the 2019-23 period than in 2014-18, respectively.

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The SEC’s Proposed Safeguarding Rule Will Cost Investors

R.J. Rondini is Director of Securities Operations at the Investment Company Institute (ICI). This post is based on his ICI memorandum.

Custodians play a vital role in financial markets, reinforcing trust and serving investors by safeguarding assets. Existing practices in the custody business are longstanding and function exceptionally well.

Yet the Securities and Exchange Commission (SEC) wants a sweeping expansion of its custody rule, which currently covers funds and securities managed by investment advisers. If adopted, the Commission’s proposed amendments would disrupt the entire custodial ecosystem, driving up costs for investors and reducing their access to professional investment advice.

Introducing Unnecessary Complications

The SEC’s proposed amendments would broaden its custodial oversight to include all assets in advisory accounts, including a host of financial instruments that aren’t assets in the traditional sense. That creates serious complications because unlike funds and ordinary stocks and bonds, some financial instruments—such as direct loans, mortgages, and derivatives—are live contracts between buyers and sellers, making them extremely difficult to custody.

If the SEC adopts its proposal, custodians will likely refuse to service those financial instruments in advisory accounts, resulting in complex challenges and increased costs for investors.

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