Barbara Novick, Co-Founder and Vice Chairman of BlackRock speaks to WOOL's Deepak Sharma and Priyanka Ghosh about the journey of building an institution from a single room. She discusses how differentiation helped the firm grow and dominate a crowded space and how its technology choices underpinned its business strategy. And what lies ahead as BlackRock tries to align sustainable value creation, social responsibilities and governance interests in the companies, it invests in on behalf of clients.
Founded in 1988 by eight Wall Street veterans, BlackRock initially specialized in fixed income products, particularly mortgage backed securities. But over time, it evolved into being a dominant player in index funds and ETFs, which attracted rapid retail and institutional flows, and propelled the company to its current leadership position.
BlackRock is the world’s largest asset manager with over USD 6.3 trillion in assets under management. Through its holdings, the firm has significant institutional stake in nearly every major listed company in the world.
As an asset manager, BlackRock emerged from the 2008 financial crisis relatively unaffected compared to large banks. Its focus on technology and data-driven approach to risk management is believed to have helped it stay clear of several toxic assets, which tainted most mortgage portfolios. BlackRock even played advisor to the US government during its bailout of the US financial system. At the time, the firm showed remarkable vision in acquiring Barclays ETF franchise of iShares, a step that contributed significantly to achieving its dominance of the segment.
Post the 2008 crisis, even as calls for increased regulation of large asset managers entities have grown, Barbara Novick, in her role of managing public policy, has steered the firm and in turn, the industry through intense scrutiny by addressing concerns from regulators and industry watchers.
Earlier this year, she was entrusted by Larry Fink, CEO, BlackRock, with an initiative that can potentially reshape corporate governance in the coming years. If she is successful in achieving the vision for the Investor Stewardship initiative, the long held but elusive goal for public companies aligning long term interests of shareholders, managers and driving socially responsible corporate behavior might finally see the light of day.
Barbara: Ironically, there is an incorrect perception and reporting that index managers like BlackRock do not actively engage with portfolio companies and that these firms outsource their proxy voting. Historically, we have engaged and actually invested in dedicated investor stewardship teams to create focus on governance. Being a very large index investor, we do not have the option of disinvesting from companies whose approach we disagree with. It is all the more reason that as long-term investors, we want to encourage behaviour that sustains the valuation of these companies and protects the interests of our clients, who are the real owners of these companies. Larry’s letter makes a case for engaging actively rather than becoming vulnerable to short-term activism, which can lead to expensive and distracting proxy fights, and sometimes prevents managements from creating long term value.
It is not as if we suddenly want to get involved with every social issue. We believe that firms can create sustainable, long term valuation with a sound approach to ESG and address the interests of multiple stakeholders. Even having employee friendly policies can be key to creating value when winning the war for talent is critical to your business success. So it’s important to have diversity, employee engagement processes and benefits, which ensure retention of talent.
A key governance issue that illustrates that value of corporate engagement is overboarding. It is important for board members to actively engage with companies, not just at a quarterly frequency. This can be difficult if someone is on more than four or five corporate boards. Over time, this structure has become less common in response to engagement on the topic.
Barbara: Well yes, it means elevating and expanding the investor steward function and engaging with the companies on a different scale. The feedback so far has been encouraging. Almost everybody has welcomed it and many have started laying out their plans and describing how those fit in with the points raised in Larry’s letter.
Similarly, a vast majority of our clients are pleased that we are engaging actively, which is different from being an activist. Importantly, we are not asking for Board seats nor are we looking to take over companies. We see our role as aiding good management practices and taking a long-term view.
Clearly, there is a lot of work ahead and every day, I read something in the papers that are new developments in the area, and I am looking forward to what’s ahead.
Even having employee friendly policies can be key to creating value when winning the war for talent is critical to your business success.
Barbara: I would say the most important idea was the one that we now call One BlackRock. While we formalized this name much later, the philosophy of a single platform that is focused on client needs has been core to BlackRock from the start. Most firms have multiple brands, strategies and platforms, and that creates parallel cultures and incentives. These siloes make it difficult and confusing for client facing teams to present the full capabilities of the firm and takes the focus away from client needs.
The other aspect, which helped us cement the idea of One BlackRock is the commitment to team work. The original eight that started the firm had the outlook that we were better as a group than we could be individually.
This focus on building an inclusive culture and the act of getting different perspectives together is prevalent even in present-day BlackRock. It is common for us to create a cross disciplinary team to address a client’s problem or a new idea that we are considering.
Barbara: Starting out, we had no money under management. So we couldn't claim that we were a great asset management company. We went out to a couple of retail platforms and asked what their clients wanted. The very first fund we did was a very high quality one, mostly consisting of mortgage products and that was a niche that did not exist at the time.
On the road show for that first fund, the feedback we repeatedly got was that people loved the asset class but they were looking for a structure wherein they could invest and get their money back at a specific point of time. This led to the creation of the Target Term Fund. At that time, these were complicated products, which reflected our commitment to finding solutions for our clients.
Similarly, in the institutional space, the people we met often said they were satisfied with their advisors and questioned what value we could add. Early on in the meetings, I would ask, "Well, what are the things you’re focused on at the moment?" Quite often, I would hear, "My defined benefit plan is in good shape but there is this tiny issue in the defined contribution portfolio that’s taking a disproportionate amount of attention because the fund tracks include an insurance contract from a company that has gone bankrupt." That was how we came up with the synthetic GIC product.
We knew that we had no hope of competing with established companies on traditional mandates, so we looked for other opportunities to gauge how money would have to be invested differently in the future. More than product innovation, listening to clients to serve them better has stayed with us as an article of faith.
More than product innovation, listening to clients to serve them better has stayed with us as an article of faith.
Barbara: In the early days, most companies would probably acquire technology in order to bootstrap themselves. When we went out looking, we had a pretty specific idea of our requirements; we needed reliable, real time data to derive analytics so that as a manager, you could trade and know exactly what you had and you wouldn't somehow accidentally short something and expose the portfolio to avoidable risk. So we started looking at and evaluating commercially available systems.
A lot of custodian-side systems were offered to us but when we looked under the hood, we discovered that these systems would require frequent reconciliations and we would not be able to rely on the data. Most of these systems also did not offer data on the underlying benchmarks we would be managing our funds against, so they couldn't let us see the risks in our client portfolios against those benchmarks.
We decided to build rather than buy, and since we had the advantage of no legacy systems, we could build exactly what we needed for our strategy, and that's how Aladdin began.
Soon we started getting more requests from clients because they loved the reports and models they could see on portfolios we managed for them. They would ask us to provide similar insight for funds being managed internally or by other managers. We soon realized we had something of value and continued to invest in it, and eventually monetized it.
Barbara: The funny thing is, it works in exactly the opposite way. The more users you get on to the system, the more securities, portfolios and perspectives you have. This only makes the platform more robust. It's very interactive and people can have their own risk levels, they can tweak models using their own assumptions, they can operate on different constraints and objectives but the whole community gets the benefit of good ideas from its members.
Barbara: On the topic of using technology, the answer is different for different investment teams. For example, an index team looks to create a portfolio with low tracking error to the relevant indexes. On the other hand, a fixed income team cares about accurate modelling of cash flows at the security level. Likewise, an active equity team might be more focused on investment ideas from big data.
On the second part, a key benefit of Aladdin is the core concept of a central data warehouse. The implications for data privacy and security are still evolving. Given that financial services is very heavily regulated to start with, the trend towards more data privacy regulations for technology platforms will make it challenging for them to develop new business models and products they can offer in financial services. That said, technology is clearly revolutionizing client interfaces and other dimensions of our industry.
Barbara: In any start-up, you have to really know your partners. I know of a number of situations, where people have started companies and they didn't last very long because the people didn’t get along. Certainly you cannot agree with everything but you have to respect each other's perspectives, and a have commitment to each other. You need to be willing to look through problems and disagreements. Not every day will be a good day, not every product will work, there will be ups and downs and ideas that work and those that don’t, but you need to band together.
Barbara: Before launching into what needs to change, I prefer to step back and celebrate the many successes that have gotten us to where we are today. When I started my career 35 years back, there were no women in top level positions at most firms in Wall Street, or for that matter in most industries, young women had no role models. So let’s recognize that we have come a very long way!
And then I would say,
The important thing is to recognize that you can have it all, but you probably cannot have it all simultaneously. No one can, so don’t berate yourself, and do enjoy the journey.