The Power of Capitalism

Transcript - Larry Fink on the power of capitalism

The Bid: LARRY FINK on the power of capitalism 

JESSICA TAN: Welcome to The Bid, where we break down what’s happening in the markets and explore the forces changing investing. I’m your host, JESSICA TAN. Joining us today is our co-founder, chairman, and CEO of BlackRock, LARRY FINK.  

For more than a decade, he’s written letters to CEOs of public companies around the world on behalf of our clients. In those letters, he has highlighted major issues that can affect corporate performance and investment returns, including issues like the importance of capital management, long-term strategy, corporate purpose, and navigating the impact of climate change.  

This year, Larry looks at how the pandemic has turbocharged an evolution in the operating environment for virtually every company, how capitalism is changing, and what it all means for CEOs. Larry, welcome back.  

LARRY FINK: Hi, Jessica. And hi, everyone. It’s good to be back at The Bid. 

JESSICA TAN: So let’s get into it. You’ve been writing these letters every year now for more than 10 years. Why do you do it?  

LARRY FINK: Well, I began writing the letters with a frustration. The frustration was getting greater and greater that the narrative every day is the ups and downs of the markets. And even today, the narrative today is about meme stocks. It’s about crypto. It’s all about items that are more short term in orientation. And in that light, as a CEO of a company, you could be captive to the short-term narrative. And I wanted to remind the CEOs and their management team and their boards that we, as a long-term investor representing all these savers worldwide, that we’re more interested in durable, long-term profits. We’re more interested in how a management team can build its position and its company to withstand the ups and downs of markets, and so it could be challenged continuously, but challenged in a way that it could continue to grow for the long term. So the whole foundation of the letters was how can we think about, as a long-term investor, helping the leaders of the companies that we own on behalf of our companies, how can we help them understand what was on our mind, and how can they properly position themselves to create an enterprise that can endure the vagaries of markets. I’m not sure about the vagaries of a pandemic, but the vagaries of the markets. And remind them that the long-term outcomes is what’s going to really achieve the needs for BlackRock and our investors.  

JESSICA TAN: And Larry, you start this year’s letter-- and in fact, you start many of your letters writing as a fiduciary on behalf of our clients. Now, can you elaborate what that means to you, and specifically what’s different between a fiduciary client relationship and any other client relationship?  

LARRY FINK: Let’s start off at BlackRock, with $10 trillion1 of client money today, none of it is our money, and we have a very large responsibility to navigate their savings, their investments that they entrusted in us, in a manner in which we are doing everything for them, on their behalf. And that’s the ultimate of a fiduciary responsibility, to be focusing on their needs, not my needs or our needs, to try to focus on can we do the best we can as a fiduciary for the men and women and families who entrusted us with their money, their savings. 

JESSICA TAN: It’s a big responsibility, for sure. And Larry, your letters have received increasing attention, particularly in recent years. And you entitled this year’s letter ‟The Power of Capitalism.” Can you talk a little bit more about that?  

LARRY FINK: Well, as you framed the question, yes, each year the letters get harder. Each year the letters get, to my surprise, quite a bit of attention. And in this period of time now, where there’s more divergence in thought, I thought it was important that we really emphasize the power of capitalism, because I do believe the power of capitalism is a positive. The power of capitalism drives transformation and change and renewal, and the best companies who are able to be challenged and refreshing themselves — and these companies are the epitome of what I believe capitalism is about. Capitalism works really well when it’s powered for society with society. It can’t just be capitalism for capitalism’s sake. We talk about stakeholder capitalism. To me, that is the essence of capitalism. And in all my letters that I’ve been writing, whether it’s the letters purely on environmental changes and climate risk, it is done through the lens of a capitalist. And I truly believe that our job is to focus on how we can build that enduring profitability on the companies that we invest for them. But importantly, it is those companies that really drive the power of capitalism. The power of capitalism for themselves, for their shareholders, for their stakeholders, but for their society and making society a more fulsome, better society for the future.  

JESSICA TAN: Now, I thought it was interesting that you wrote how capitalism itself has evolved, right? So Larry, let’s build on what you just said about stakeholder capitalism. That’s certainly a theme that seems to run throughout the letter. What does that mean to you, and why is it so important?  

LARRY FINK: Well, if capitalism doesn’t work with society, then it fails. Capitalism does not work if it’s in this vacuum and it’s separate from the needs and the wants of society. It has to be done interconnectedly. Stakeholder capitalism, in my mind, is what capitalism is all about. As a leader of a company, we have three or four stakeholders that we have to be conscious of, that who we have to be driving our efforts as a leader of our company for their benefit.  

To me, our business and how we have been working over these last few years, in these COVID years, those companies who were more focused on their stakeholders— and what I mean by that, their employees. Working with their employees, for their employees, making their employees feel connected, even though they are working remotely. Working with their clients, even though you’re not connecting physically with your clients as much as you’re used to, but you’re connecting with your clients. You’re serving the needs of your clients. And as I spoke about capitalism and the need to be connected to society, stakeholder capitalism is about driving your purpose in every community where you work.  

And that, to me, is the power of capitalism and the power of stakeholder capitalism. Serving your three major entities — your clients, your employees, your community — will drive more consistent, more durable profitability for your shareholders. And then your shareholders are the big beneficiary of your corporate purpose driving stakeholder capitalism.  

JESSICA TAN: So let’s talk a little bit more about one of those relationships, the employer-employee relationship. And this has really transformed during the pandemic. Many people are reassessing their priorities in life. There’s a high quit rate, especially in the U.S. and UK. Rising wages. And this has really intensified the war for talent. Employees have raised their voices, and they’re demanding more from employers. So what should CEOs do to create environments that help them attract and retain the best talent?  

LARRY FINK: We’re starting our third anniversary--  

JESSICA TAN: It’s crazy to think about.  

LARRY FINK: Working in a COVID world. Those companies who are connecting with their employees, those companies who are helping their employees, whether it’s a mental health issue or helping their employees try to manage their lives with child care. We are seeing a huge differentiation right now between companies who have focused on their employees through stakeholder capitalism and companies that did an inadequate job or a poor job.  

But I do believe the drive for talent is going to be bigger and bigger and bigger for all companies. When I talk to business leaders in every industry, the drive for talent, the retention of talent is a more important issue than ever before. Because we all know, when you have a high turnover rate, the training, the recruiting is very expensive. And it erodes culture. And it may be an early indication of something else wrong with a company. And I would urge every board to spend more time focusing on their talent, focusing on their turnover rates, and how can they build a deeper, stronger connectivity with their employee base so their employee base feels like they’re being connected and they are being taken care of.  

And I think this is a really important issue, Jessica, because more and more individuals are focusing on where they work. This is why we have this high quit rate. And they want to work at a company that they believe in more than ever. It’s not just wages anymore. It’s they want to be at a company where they feel that their association with this company is a net positive, not a net negative. And I do believe those companies who are truly focused on their purpose are driving more consistency with their employee base. They’re driving more success and retention, and they’re building a stronger, more resolute culture.  

JESSICA TAN: Makes sense, right? People want to associate with purposeful work. That’s what they want to show up for, especially in times like this. In several sections of the letter, you talk about risks to companies, so the access to capital and technology driving increased competition. So, if you’re a CEO reading this letter, should you take that as a warning about the future?  

LARRY FINK: Gosh, I don’t know if it’s a warning of the future or just a statement of today. I think one of the great successes over the last 30 years is the expansion of the global capital markets. And I think access to capital has broadened so dramatically that we are seeing capitalism working even better. This is fantastic. At the same time, management teams, business leaders, boards need to be very aware that with this easy access to capital, whether it’s in public markets or private markets, we have the ability to see more and more new technologies more rapidly, more new entrants in every industry, and so it should not be a warning to any management team. It should just be a statement of fact that there’s more and more disruption going on.  

And I look at this as something that we should understand as an incumbent. Every incumbent company should be looking at this as a mechanism. How can they become a disruptor, not just an incumbent? And for every industry, for every company to be aware that we’re going to see more and more disruption, whether it’s from an incumbent or a new entrance. That is the beauty of capitalism, of the refreshing and the renewal, and that is one of the fundamental reasons why I remain to be an optimist. Because it is through that process of refreshing and renewal creates new and better opportunities, and I see some huge opportunities in the future focusing on refreshing and renewing how we think about environment and decarbonization.  

So all of this is does lead to opportunities and within opportunities, are you going to be left behind as a company? And that’s the challenge that every management team, every board really needs to understand. Where in the spectrum do you fit in as a company in every industry? Are you prepared for the disruption that may occur in your industry? Are you going to be the disruptor, or are you going to allow a new entrants to come in to disrupt you?  

JESSICA TAN: Now, Larry, you mentioned decarbonization, and for the past two years, climate change and sustainability have been prominent themes in your letters. So two years ago, in 2020, you wrote that climate risk is investment risk. Last year, you wrote about the importance of the path to net zero. So what are your views on sustainability today?  

LARRY FINK: It’s just as strong as it was two years ago, probably stronger. We have witnessed this tectonic shift of investor preference. In every conversation I have with business leaders, every business leader needs to be aware that we’re seeing money in motion. We are seeing money being reallocated. Whether it’s being reallocated across all industries or a few specialized industries, but we are seeing more and more money moving. And the amount of money that has moved into more sustainable strategy is just the beginning. If you’re a company that is not winning those flows because you’re not moving fast enough, you’re going to be seeing money outflow in your shares, and money inflows to a competitor or to another industry. And so if anything, sustainability is going to become a larger and larger dialogue. That dialogue, though, has to be connected with the concept that if we focus on a more decarbonized world, we need to be focused on-- if we don’t create the new technologies, if we don’t find those 1,000 unicorns that I write about, we’re going to have higher inflation as we decarbonize. And I don’t believe politically that is a palatable or acceptable pathway. And this is why we have to be working with government together, businesses and government, to try to find a way that we could create a fair and just transition. It is not a statement that I’m stepping backwards. I’m actually saying we need to move faster. But the only way we move faster is working together and try to find a pathway that is fair and just in working forward.  

And so the amount of capital I see that’s going into these strategies and these investments is only going to accelerate. And so, the issue that I have with companies that are not moving forward fast enough, they’re going to be left behind. And in my letter, I asked every business leader, are you going to be a phoenix, or are you going to be a dodo? And I really do believe, in a cute way, that’s really one of the big essence of what we’re seeing.  

And so right now, with the present technologies that we know about, we’re not going to have a fair and just decarbonization platform unless we create these new technologies. What I’m very worried about is the emerging world. In 2021, the emerging world actually used more coal this year than they did the year before. And for them to move forward in a fair and just way, we have to focus on how do we bring them forward, too? 

But these are very complex issues. It is very hard in the short run to be able to manage and navigate the cost of hydrocarbons in the short run. What I’m urging people to understand, decarbonization means going from multiple shades of color until we get to a green. It is not going from one dark color to green. And it’s going to be step by step by step.  

I’m actually pretty optimistic that we’re going to find solutions. It’s certainly not going to be a straight line. It can be quite lumpy. And so to get to this decarbonized world, it’s going to require governments and business working together. It’s going to require huge investments in new technologies, and we’re going to-- those new technologies, when they’re realized, we’re going to be able to leapfrog and get to a decarbonized world.  

JESSICA TAN: Larry, it’s so amazing to hear about the investment opportunity that’s being created by the net zero transition. You talked about the 1,000 unicorns. So basically, the next unicorns are going to be startups that help the world decarbonize. We obviously read a lot about electric cars, about hydrogen, clean energy. So are all the opportunities in startups, or what do you think the role is for traditional energy companies to play in the net zero transition?  

LARRY FINK: During 2021, I spent a great deal of time talking to leaders of incumbent hydrocarbon companies. I’m pleased to say there is huge recognition that they want to be a leader in this decarbonizing world. They certainly have the science and the technology to really understand how can we move to a more green world? How can we move into new areas like hydrogen, and how do we create more renewable type of energies that will not pollute the world? So, our job is to work with them, not against them. This is why I’ve been repeatedly saying, I am against divestiture. I’m against even the hydrocarbon companies selling their assets to private companies, because it doesn’t change the world’s net footprint. We have to holistically understand how to move forward. Unquestionably, we’re going to be investing in startup companies, too. And working with traditional companies to helping them invest in new technologies, but also the enthusiasm and fun of meeting some very smart scientists who have a new way of looking at, let’s say, steel or, for that matter, hydrogen or cement, in ways that we could produce those products in a more green way that is not that inflationary. That’s going to be the huge opportunities, and I am so excited about the next 10 years as we are going to be able to invest side by side with some traditional companies but also side by side with a bunch of startup companies.  

JESSICA TAN: Larry, it’s been over a decade since you wrote your first letter, and so much has changed in that time. What are the key lessons you’ve learned during this process?  

LARRY FINK: When I think back over the last 10 years, you think about how many crisises as we lived in over the last 10 years, and yet we moved forward. So probably the most important thing I could say I learned is the power of the markets, the power of capitalism, the power of successful ideas and what can they do in terms of creating real value. And I would probably just say more than ever in my 40-plus years of doing this, in the long run, optimism does prove out to be the successful strategy.  

That is not to say we’re not going to have downdrafts. That’s not going to say we’re not going to have setbacks. It is not to say that we’re not going to have some very serious disruptions in the short run. But we find solutions. We move forward. We work together with society. Unquestionably, optimism, believing in capitalism, believing in how the power of stakeholder capitalism has really shone a light on how individual companies prevail beyond the whole component of capitalism. And I would just probably say the last thing is you come away, especially with a resiliency that we see today here at BlackRock, or we see in so many other parts of the world, in so many companies. The resilience of people.  

JESSICA TAN: Larry, one last question. Building off of what you just said about you being an optimist and the lessons that you’ve learned, as we begin 2022 and look toward the future, what are you most optimistic about?  

LARRY FINK: That we’re going to find solutions, and we’re going to build a better future. I mean, we are building a better future, and the key is how can we create it-- even make it more inclusive for more? How do we build a better future for more? I think the quit rate is a great example of optimism. Optimism is probably deeper within society today than just a few, that so many people feel that they can quit and they can move on. I’ve always believed in the power of the global capital markets, and we built BlackRock on that foundation. And I do believe the power of capital markets is going to continue to drive wealth creation worldwide. The power of capitalism is going to refresh and renew different companies and different industries, and the power of capitalism is going to create some wonderful new startup companies.  

I am optimistic that we’re going to move forward in a very positive way. The science research from medicine because of COVID created an mRNA vaccination. We’re going to be able to find solutions for other viruses through this technology. It is a beautiful thing to see how we evolve and change, and I really do believe we, as humanity, are growing and getting better. And I know there’s a lot of naysayers who believe it’s getting worse. But if we focus on long-term solutions, if we create a better dialogue-- and I want to really underscore that. If we create a better dialogue with governments and business together, we’ll solve problems even faster.  

JESSICA TAN: Well, thank you, Larry. Thank you for joining us today and for sharing your perspectives on The Bid.  

LARRY FINK: Thank you, Jessica.   

JESSICA TAN: If you’d like to read Larry’s annual letter to CEOs and learn more, visit BlackRock.com/CEOLetter.