On Tuesday, the CEO of BlackRock, the world’s largest asset manager, sent a letter to the chiefs of some of the biggest corporations decrying what he sees as excessive payouts to shareholders at the expense of investments in employees and other resources.
The letter says that too many CEOs have been giving shareholders money through stock buybacks and dividends with an eye on the short term rather than putting money toward the long term. “The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” Laurence D. Fink, BlackRock’s chief executive, writes in his letter. That means they are spending less on “innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth.”
This year, shareholders at the largest American companies can look forward to getting $1 trillion in dividends and buybacks. That’s after hitting a record payout in February. Corporations are collectively sitting on $1.75 trillion in cash and marketable securities, but are spending about 95 percent of their earnings on shareholders.
This follows a trend that began 30 years ago, when companies began spending more money on investors over other priorities. Between 2003 and 2012, stock buybacks and dividends absorbed 91 percent of earnings. And since the 1980s, when a company borrows money it puts most of it toward shareholders instead of investments.
This leaves little room for investments in other things, such as higher wages or buying new equipment. That’s part of why stock prices are hitting records while wage growth is puttering along at the slowest rate since the 1960s.
CEOs often face pressure from shareholders to make these payouts because of the short-term gains, while executive compensation is increasingly tied to short-term outcomes like stock performance that are driven by things like stock buybacks. But given that BlackRock’s business model means that it often holds onto investments for decades at a time, unlike many financial companies, it can take a view toward the long term. It also oversees $4 trillion in investments, making it an important shareholder for many companies, so the letter may carry some weight.
Fink noted, “There is nothing inherently wrong with returning capital to shareholders in a measured fashion.” But he suggests reforms to address what he sees as a troubling trend. “We believe that U.S. tax policy, as it stands, incentivizes short-term behavior,” the letter says. He recommends taxing the gains on investments that are held by a company for less than three years as income, rather than the lower capital gains rate that applies after one year now. Another way to reverse the drive toward shareholder payouts would be to have the Securities and Exchange Commission more closely regulate stock repurchases, which currently have very few regulatory limits.