BlackRock, which manages more shareholder equity — $1.7 trillion in active funds — than any other entity, is telling corporate America that it must have a “sense of purpose” if it wants its support, and it asserts that “the time has come for a new model of shareholder engagement — one that strengthens and deepens communication between shareholders and the companies that they own.”
The message comes in the form of founder, chairman and CEO Larry Fink’s annual letter to CEOs, which was released yesterday.
Profits, of course, are still the bottom line, and “your company’s strategy must articulate a path to achieve financial performance,” Fink writes. “To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends — from slow wage growth to rising automation to climate change — affect your potential for growth.”
The “public” expects it, Fink says.
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” he asserts.
“One recent survey by the investment consulting firm Callan found that just 39% of investors said the payoff for considering [environmental, social and governance practices, or ESG] issues in investment decisions was unclear, down from 63% in 2016,” reports Jena McGregor for the Washington Post. “Once the domain of socially responsible mutual funds or a major focus of activist pension funds, such factors have grabbed the attention of a broader array of shareholders as they evaluate where to invest.”
Take, for example, activist investor Jana Partners and the California State Teachers’ Retirement System publicly urging Apple to counter teens’s overuse of iPhones and social media.
But what exactly does Fink mean “by social responsibility or making a positive contribution to society?” NPR’s “All Things Considered” host Ari Sharpiro asked NPR reporter John Ydstie yesterday.
“Well, what he said was that many governments are failing to prepare for the future on issues ranging from retirement and automation and worker training, so society is now turning to the private sector, to companies to respond to these challenges. And he notes that a big part of the polarization we see in the U.S. and around the world today comes from a lack of job and retirement security, especially for workers who don't have much education,” Ydstie responded.
In breaking the news about the letter Monday evening, the New York Times’s Andrew Ross Sorkin wrote that “part of Mr. Fink’s argument rests on the changing mood of the country regarding social responsibility. He contends that if a company doesn’t engage with the community and have a sense of purpose, ‘it will ultimately lose the license to operate from key stakeholders.’
“Companies often talk about contributing to society — sometimes breathlessly — but it is typically written off as a marketing gimmick aimed at raising profits or appeasing regulators,” Sorkin continues.
Given the precarious climate, in more ways than one, it’s got to be more than that now, some argue.
“The statement from such a big player in the investment space shows that these matters will play an important role in how companies operate moving forward,” writes Patrick Gorman for Chief Executive.
“Yale School of Management senior associate dean for leadership studies Jeffrey Sonnenfeld says the statement is a bold move that should be applauded,” Gorman continues. And Sonnenfeld points to “PepsiCo’s successful Performance with Purpose sustainability initiative launched by CEO Indra Nooyi in 2006 as an example of a company handling corporate social responsibility the right way.”
Then again, some maintain that the very idea is like something out of a Marxist toolkit.
“BlackRock’s Betrayal: #Woke Wall Street Pushes Leftist Agenda on Corporate America” is the headline on a Briebart reaction to Fink’s letter.
“Larry Fink is probably the most powerful person most Americans have never heard of. And now he is deploying his vast power to cajole corporate America into pursuing a left wing agenda under the guise of asking them to ‘contribute to society,’” writes John Carney.
Meanwhile, Bloomberg “View” columnist Matt Levine suggests that “making a positive contribution to society” is an exhortation that’s easier said than executed.
“Obviously this is a ... strange ... approach for a massive provider of index funds? Pick your least favorite public company — guns or tobacco or oil or opioids or Facebook or whatever you think is doing the most harm to society — and BlackRock Inc. is among the top five holders,” Levine writes. “Fink's threat — contribute to society or you'll lose BlackRock's support — rings a bit hollow since BlackRock's index funds can’t sell. (They can vote against directors, sure, but what exactly do you want a gun maker’s directors to do?)”
And, Sam Zell, founder and chairman of property specialist Equity Group Investments, “questioned whether America is ready to have BlackRock ‘in charge of the NYSE,’ saying ‘I didn't know Larry Fink had been made God,’” in an interview on CNBC’s “Squawk Box” yesterday, Berkeley Lovelace Jr. reports.