Commentary on Political Economy

Thursday 17 February 2022

 Calling Out ‘Emperor’ Larry Fink

Charlie Munger says what many CEOs think but decline to say.



When you’re 98 years old you can say things others can’t, so bravo to Charlie Munger for daring to speak an important but too muffled truth about today’s financial markets. “We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Warren Buffett’s Berkshire Hathaway partner said Wednesday. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.” Many CEOs no doubt privately agree.

Opinion: Potomac Watch

WSJ Opinion Potomac Watch

As Americans have poured savings into exchange-traded and mutual funds, index providers have become the de facto largest shareholders of public companies. Assets under management by Mr. Fink’s company, BlackRock, have doubled to $10 trillion since 2016.

Asset managers, including BlackRock, Vanguard and Fidelity, mostly invest their customers’ money in broad baskets of stocks that track an index like the S&P 500. Index funds make sense for most retail investors who lack the time and information to actively trade stocks. But lately these so-called passive index providers have themselves become activists, and not in a good way.

Rather than push companies to pursue higher returns, they’re trying to impose their political agenda on corporate America. CEOs and corporate boards can find themselves on the wrong end of a shareholder vote if they refuse to accommodate BlackRock’s policy preferences on climate and “stakeholder capitalism.” Hail, Caesar, er, Larry.

Two years ago Mr. Fink wrote a letter to CEOs threatening to vote against corporate managers if they didn’t follow environmental, social and governance (ESG) disclosures prescribed by the Sustainability Accounting Standards Board. That Michael Bloomberg -backed outfit wants companies to report minutia from how much plastic they use to sales from sugary beverages.

In his annual letter this year, Mr. Fink did have some nice words about capitalism, which has been very, very good to him. But he also lectured CEOs that “employees are increasingly looking to their employer as the most trusted, competent, and ethical source of information,” and “stakeholders” including employees, customers, communities, and regulators “need to know where we stand on the societal issues intrinsic to our companies’ long-term success.”

Mr. Fink will also tell you what stand to take on those issues. He and his allies have become major swing votes in proxy board battles and shareholder resolutions. Climate-focused activist fund Engine No. 1 held only 0.02% of ExxonMobil shares, but it nonetheless managed to oust three board members last summer with the support of the Emperors’ club.

“Many savvy governance observers were paying close attention to how Exxon’s top three investors—Vanguard, BlackRock, and State Street, in that order—voted,” a Harvard Law School Forum on Corporate Governance article noted. “The Big Three, which own roughly twenty percent of the S&P 500’s outstanding shares, had made significant climate commitments over the past several years.”

Berkshire Hathaway makes selective investments in companies, and with great success over decades. So Mr. Munger may have a philosophical investing difference with index funds. But that doesn’t mean he’s wrong about BlackRock’s market power, which Mr. Fink is using for political purposes. We hope Mr. Munger’s comments trigger a larger debate about the Emperor and his commands.

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