Last year Larry Fink’s letter to CEOs of companies in which BlackRock invests urged them and their boards to look forward (as opposed to back) at strategic issues affecting value creation. (See my blog from 2016).
This year, his letter to CEOs urges them specifically to look at a ticking timebomb: the lifecycle of employees’ careers – not only ongoing retraining and ongoing education of workers, but also of actively preparing them for a secure, solvent retirement.
The letter covers some strategic corporate and governance issues on which BlackRock will hold companies to account, such as:
- Globalization and more particularly the effect of automation on lower-skilled employees’ jobs and the consequent gulf in their earnings versus highly-educated employees
- As an active, long-term investor, engaging with companies on behalf of their clients, and voting against incumbent directors or misaligned executive compensation, when companies are not sufficiently responsive to BlackRock’s input
- Reviewing companies on Environmental Social and Governance (ESG) performance – often seen as an indication of a company’s appreciation of long-term factors that affect value creation and how seriously global companies see themselves as part of a local community
- Research and technology and employees’ development and long-term financial wellbeing
Fink sees the government’s role as supporting the private sector in addressing these challenges by creating a capital gains regime that rewards long-term investment, tax reform, infrastructure investment and strengthening retirement systems.
On tax reform, he doesn’t want to see cash trapped overseas simply being repatriated in share buybacks, but used for strategic growth initiatives. Infrastructure investment will promote employment and may go some way towards providing jobs to less skilled workers who have lost work as a result of their jobs being automated. “However,’ he notes,’…it’s not a solution to that problem.”
Companies that are currently struggling for technical talent must build their education and training capabilities in order to retrain existing employees for the new demands of the high-tech and connected workplace. In ‘helping the employee who once operated the
machine to learn to program it’, companies will have ongoing access to talent, while fulfilling their responsibilities to their employees. Chopping out older employees and bringing in fresh talent, apparently, might not be sustainable or competitive.
And once employees reach retirement, Larry Fink is concerned by two issues:
First, that millions of workers are not covered by employer-provided retirement plans and he’d like to see this change via a selection of options, including auto-enrolment, auto-escalation, pooled plans for small businesses and ‘potentially even a mandatory contribution model like Canada’s.’
Second – as many pensions move from defined contribution to defined contribution/money purchase pensions, the financial planning and responsibility for retirement funds moves away from the employer and falls more on the individual pensioner. In this context, companies have a role in ensuring that their employees become more financially literate, while asset managers also have a responsibility to educate investors so they can make smart investment decisions.
“If we are going to solve the retirement crisis – and help workers adjust to the globalized world – businesses need to hold themselves to a high standard and act with the conviction that retirement security is a matter of shared economic security,” writes Fink
Commentary: As the Baby Boomer population ‘bulge’ in the West creates more pensioners supported by fewer workers over the coming years, companies and governments must review their terms of reference.
Older workers, made redundant before retirement give the system a ‘double whammy’ shock as an employee moves from being a net contributor to tax, their pension pot and social costs, to being an early ‘taker’ of benefits.
Companies look like they win twice with a reduced wage bill and no ongoing social or pension costs.
The option of passing older employees on to the State to look after, without penalty, seems to be an implicit incentive for companies to do just that.
This isn’t sustainable, but a last resort would be for governments to hike taxes charged to employers to pay for taking on responsibility for the companies’ ‘surplus workers’.
In this context, governments that find ways to encourage, support and incentivize companies to retain, retrain and educate their older employees will not only help in assuring continuity of employment but will also limit avoidable social security costs for unemployment and pension support.
Loom photo and header photo: Courtesy ILO. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License. To view a copy of this license, visit creativecommons.org/licenses/by-nc-nd/3.0/igo/deed.en_US