BlackRock’s Chief, Laurence Fink, Urges Other C.E.O.s to Stop Being So Nice to Investors

[Axulus]

So close but you vered off course just as you were almost there. There are not enough investments in the real economy of making products for consumption.

Cite? How much investments are available? How much is needed to "make products for consumption"?

Business investment soaks up only about 25% of the corporate profits every year. The excess profits above what is invested in businesses, both in new businesses and existing businesses, must go into Wall Street's paper investments.

It must? Cite?

These are stocks, bonds, derivatives such as futures in commodities, etc. If this money goes into real assets they cause inflation in those assets and eventually an asset bubble in those real assets. We have seen this over and over, in the stock market, in commodities such as gold and oil futures, in real estate, etc.

A rise in asset value is not inflation. Inflation is the rise in the overall price level in the economy.

The asset bubbles cause by this excessive amount of profits destabilizes the financial markets, often with disastrous results as we saw in 2008 when the housing asset bubble popped.

A rise in asset values results in creation of more of the assets - a rise in supply, in response to the demand. Hence why we saw so many houses being built during the housing boom. How do you determine when something is a "bubble" vs. when there is real demand and additional supply is needed?

It t use to be that such asset bubbles were created by interest rates that we too low, that encouraged speculation. But at least it gave the Fed some control over the situation if they were interested in doing so by increasing interest rates and by selling their government bonds. But the new normal is speculators not borrowing to create bubbles but creating the bubbles with the excess profits that we are purposely giving to them.

Bubble - that term doesn't mean what you think it means.

Once again, we should be increasing wages to decrease these excessive profits. No Loren, increasing wages doesn't require an infinite pool of profits. Only excessive profits. Wages are the vast majority of the demand in the economy. No one would argue that we have too much demand in the economy right now. Most economists and most business people will tell you that we are short of demand right now.

Define "excessive" profits.

Also, cite to "most economists..."?

Remember, that when we are dividing up the nation's income the rich are confirmed neoliberal, supply side, Reaganomics true believers. But when they decide whether or not to invest that money they become confirmed Keynesians, because the other is only a fantasy meant to further enrich the already rich. Keynes described the economy that is real.

Pure white noise - I don't understand a word of this part.

 

[dismal]

Nothing in your link shows that shareholders have any rights to corporate cash flow outside of what the Board has approved or if there are assets remaining after a liquidation event.

I appreciate your posting a link to debunk my use of the overly broad term "anything". However you still haven't provided any evidence that shareholders have any right, outside of the limited cases I've already mentioned, to the cash of a corporation.

If the corporation is sitting on piles of cash the shareholders have no claim upon that cash.

a) You are wrong. The shareholders have the claim on all residual cash. This is why they get paid the residual cash in a liquidation event. They may through the corporate documents they adopted or the directors they elect approve some management discretion over the cash and may have given up the ability to directly effectuate a distribution, but the CEO may not give the cash to whomever he chooses. If he's going to distribute residual cash it goes to the shareholders not himself or his grandmother.

b) Why are we arguing about this? Are you trying show CEOs are exceptionally generous to shareholders and give them cash they could have given to themselves or their grandmothers?

I mean, if you are correct that shareholders are not entitled to the cash they must be doubly plus delighted to get it, and want even moreso to hire/reward CEOs who are generous enough to give it to them.

 

[ksen]

I mean, if you are correct that shareholders are not entitled to the cash they must be doubly plus delighted to get it, and want even moreso to hire/reward CEOs who are generous enough to give it to them.

I'm sure some of them are happy. However some rather big investors are getting worried that the heavier use of special dividend payouts and stock repurchases are hurting the companies long term growth potential which in turn would hurt the future appreciation of their held stock.

 

[Axulus]

I mean, if you are correct that shareholders are not entitled to the cash they must be doubly plus delighted to get it, and want even moreso to hire/reward CEOs who are generous enough to give it to them.

I'm sure some of them are happy. However some rather big investors are getting worried that the heavier use of special dividend payouts and stock repurchases are hurting the companies long term growth potential which in turn would hurt the future appreciation of their held stock.

If only shareholders could vote for the board of directors to determine whose idea gets to be implemented, this conflict could be resolved...

 

[dismal]

I mean, if you are correct that shareholders are not entitled to the cash they must be doubly plus delighted to get it, and want even moreso to hire/reward CEOs who are generous enough to give it to them.

I'm sure some of them are happy. However some rather big investors are getting worried that the heavier use of special dividend payouts and stock repurchases are hurting the companies long term growth potential which in turn would hurt the future appreciation of their held stock.

In my experience as an investor of other people's money they all like to get cash back. Our performance is generally measured in terms of the cash we send back. We like to get cash back from the investments we make too. Indeed, it's generally considered almost the entire point of investing.

 

[dismal]

I mean, if you are correct that shareholders are not entitled to the cash they must be doubly plus delighted to get it, and want even moreso to hire/reward CEOs who are generous enough to give it to them.

I'm sure some of them are happy. However some rather big investors are getting worried that the heavier use of special dividend payouts and stock repurchases are hurting the companies long term growth potential which in turn would hurt the future appreciation of their held stock.

I should add that I agree with the second part of your statement. If the companies have great projects to do with the cash they should do them instead of send the cash out. What you have not done is demonstrate they have better uses of the cash than investors have on their own. I as an investor in McDonalds don't want the McDonalds CEO taking money made selling Big Macs and making biotech investments. If would rather have him send me the money and let me make biotech investments with people whose expertise is making biotech investments not selling Big Macs. If he has ways to use the money to make even more money off of his expertise in selling Big Macs, then yes I'd rather have him do that.

 

[jonatha]

Can you provide a cite to Carl Ichan or others like him shooting down proposed investments by management at these companies?

Why would Icahn invest in a company that wasn't sitting on a cash hoard it didn't know what to do with?

His entire metier is prying cash out of tightfisted management....

 

[jonatha]

I as an investor in McDonalds don't want the McDonalds CEO taking money made selling Big Macs and making biotech investments. If would rather have him send me the money and let me make biotech investments with people whose expertise is making biotech investments not selling Big Macs.

Nowadays buying a Big Mac may well be a (small) investment in biotech, or at least big pharma....

 

[ksen]

I'm sure some of them are happy. However some rather big investors are getting worried that the heavier use of special dividend payouts and stock repurchases are hurting the companies long term growth potential which in turn would hurt the future appreciation of their held stock.

In my experience as an investor of other people's money they all like to get cash back. Our performance is generally measured in terms of the cash we send back. We like to get cash back from the investments we make too. Indeed, it's generally considered almost the entire point of investing.

Generating cash flow is an important part of the investment strategy of some people. However it's an overreach to say cash flow is the entire point of investing.

Some people invest for cash flow.
Some people invest for capital appreciation.
Some people invest to hedge against their other business activities.

There are many reasons people invest and getting cash flow is only one of the reasons and for some not that very big a reason.

 

[coloradoatheist]

In my experience as an investor of other people's money they all like to get cash back. Our performance is generally measured in terms of the cash we send back. We like to get cash back from the investments we make too. Indeed, it's generally considered almost the entire point of investing.

Generating cash flow is an important part of the investment strategy of some people. However it's an overreach to say cash flow is the entire point of investing.

Some people invest for cash flow.
Some people invest for capital appreciation.
Some people invest to hedge against their other business activities.

There are many reasons people invest and getting cash flow is only one of the reasons and for some not that very big a reason.

So are you saying that when I give $100 as an investment I don't want to get $100+x dollars back sometime? I'm okay if I only get $10 back?

 

[ksen]

I'm not saying anything about your investment strategy in particular. How should I know what you, coloradoatheist, want to get out of an investment? I never claimed to know your investment strategy.

 

[coloradoatheist]

I'm not saying anything about your investment strategy in particular. How should I know what you, coloradoatheist, want to get out of an investment? I never claimed to know your investment strategy.

But that's not dismal's argument. He is saying that if I put $100 in an investment, I actually want to get $100 + X dollars back. I don't know many people whose investment strategy is to get $100-X dollars back.

 

[ksen]

I'm not saying anything about your investment strategy in particular. How should I know what you, coloradoatheist, want to get out of an investment? I never claimed to know your investment strategy.

But that's not dismal's argument. He is saying that if I put $100 in an investment, I actually want to get $100 + X dollars back. I don't know many people whose investment strategy is to get $100-X dollars back.

You should probably reread our exchange since dismal and I are talking about dividend payments.

 

[coloradoatheist]

But that's not dismal's argument. He is saying that if I put $100 in an investment, I actually want to get $100 + X dollars back. I don't know many people whose investment strategy is to get $100-X dollars back.

You should probably reread our exchange since dismal and I are talking about dividend payments.

Except that was what his argument was, that they like to get their money back plus the extra as a return for the money. The argument that you two are disagreeing on is how long of a period that a an investor should get his money plus return back. Fink says it should be a long time, while others say it should be shorter.

 

[coloradoatheist]

The disagreement is the duty that the officers have in the company to the shareholders and what time frame is that duty. Is the duty this year, or 10 years down the road. It's also interesting that people have made the argument that companies shouldn't always worry about always having to keep growing, but a stable company that produces profits and returns them as dividends should be considered a good thing.

However. I do also agree with the settlement on trying to understand what the hesistency of companies investing are.

 

[dismal]

Can you provide a cite to Carl Ichan or others like him shooting down proposed investments by management at these companies?

Why would Icahn invest in a company that wasn't sitting on a cash hoard it didn't know what to do with?

His entire metier is prying cash out of tightfisted management....

So if I don't want Icahn raiding me I pay out that cash to shareholders, right?

- - - Updated - - -

But that's not dismal's argument. He is saying that if I put $100 in an investment, I actually want to get $100 + X dollars back. I don't know many people whose investment strategy is to get $100-X dollars back.

You should probably reread our exchange since dismal and I are talking about dividend payments.

Dividends are just one way of distributing cash to shareholders. There are others.

 

[Togo]

So some investors probably want cash as soon as possible. They don't know or care much about the company, they bought it because it was going north on some graph they saw, and they want a payoff now. So they pressure the CEO into making the payment, and then they'll be happy.

They'll also sell their shares.

Think about it. If they're investing because they want a dividend payment, and you give it to them, then why would they stick around? You're less likely to pay out twice than another company is to pay out once, so the logical thing to do is to sell your shares and invest in a company that hasn't made a payout yet, and start putting pressure on them.

In that kind of context, Laurence Fink's advice to CEOs makes perfect sense. Making a large dividend payment sounds like a good idea, but it could lead to the share price going down.

It might also go down if you have another kind of investor - the kind that's wanting the price of their holding to go up. Paying a dividend then is a sign that you're not looking for more money to invest, but rather want to sit back and take profits. If your investors were hoping your company was going to grow, then they may leave and try a different company.

I saw the same advice from a small medical device start up (making medicated stents). The CEO/founder had the experience of making an early dividend payment, as demanded by some of his investors, only see investors sell up and move out as a result.

Again Laurence's advice makes sense here. He's telling CEOs that he'll have to not recommend their company if they're too generous to shareholders. Since his company's job is making investment decisions, and they control a lot of funds, that's quite important news.

That also makes sense of his other comment, that cash isn't all that valuable at the moment. If your investors get annoyed and move on, they will be quickly replaced. Pay them accordingly.