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Decoding Larry Fink’s CEO Letter

Blackstone is the world’s largest investor. So it’s news when its CEO, Larry Fink, sends a letter to the CEO’s of the S&P 500. He sent one last year and just sent a new one this month that is printed in full at Business Insider in which he calls for longer-term thinking in American companies. It’s an exciting read for those of us who believe that longer-term thinking will drive greater profits and prosperity.

My colleagues in the integrated reporting (<IR>) movement have shared some great thoughts about the letter including in the IIRC newsletter and the <IR> LinkedIn Group. But I think there’s more to say about how the vocabulary he uses in the letter connects with the integrated reporting movement. (I don’t know if he meant to connect with the <IR> vocabulary but I think the comparison is instructive):

We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation.

Integrated reporting is a framework for mapping and measuring long-term value creation. Its core concept is that each company has multiple types of capital. This capital is put to use in the short term to create value for customers, stakeholders and shareholders. But to be successful over the long term, this capital has to be put to work in a way that also preserves and hopefully increases the capital base for the future.

There’s nothing new about the need for companies to create short- and long-term value. What’s new is that traditional financials don’t capture two key types of capital that have grown in importance/attention. The first is the growth in the relative value of intangible knowledge capital (know-how, data, processes, designs, networks and even people). Since the rise of information technology a few decades ago, the intangible portion of corporate value has risen from 18 to 84%. Second is the growing realization that externalities like resource use and abuse are a relevant business issue.

We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment. We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries, that support strategies for long-term growth.

If you accept that the value creation system of a company includes tangible, intangible and natural capitals, these statements about “balanced capital plans” and “value-creating investment” take on new meaning. Companies spend enormous amounts of money on all of the capitals. Except for investments in tangible assets, this money is not considered capital expenditure so the accumulated effect of the investment is invisible (this is how the 84% corporate value gap happened).

When we wrote Intangible Capital in 2010, we included a chapter on what we called i-capex (intangible capital expenditure). I always thought that this would be a powerful place to start in measuring the capitals. It turns out that that chapter has been viewed as the most radical of all. Maybe the time has come to re-visit it?

But one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses.

Everyone loves to complain that investors are short-sighted. But companies actually have themselves to blame in many ways. With such a large portion of corporate value intangible and off-balance sheet, the only hard data that analysts have is the income statement, which is by definition a short-term, backward-looking measurement. If we don’t give stakeholders (including investors) a replacement for what they used to get from a balance sheet, nothing will change. Which leads us back to the need for the framework that looks at the whole ecosystem…..

I’m actively working/looking for ways to build momentum for <IR> in the U.S. I have a short plan that I’m happy to share. I’d love to hear feedback here or email - adams at smarter-companies.com.

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