BlackRock CEO Urges Private Industry to Consider its Overall Impact

January 16, 2018; New York Times

Laurence Fink, the CEO of BlackRock and “one of the most influential investors in the world,” has made headlines this week for his annual letter to his shareholders, which encouraged companies to show how they were “making a positive contribution to society.” While it’s good to see people with huge amounts of capital and influence acknowledging the importance of social responsibility, and Fink’s models for good reflect some practices of the nonprofit sector, the degree to which he will be willing or able to enforce his edict is up for debate.

Andrew Ross Sorkin of the New York Times claimed that Fink’s letter differed from other highly publicized but largely ineffectual lip service to public responsibility “because his constituency in this case is the business community itself. [The declaration] pits him, to some degree, against many of the companies that he’s invested in.”

Readers may remember Buzz Schmidt wrote about the need for this kind of moral accountability and leadership among businesses in his 2011 NPQ article, “The Wherewithal of Society: an Accountability Challenge to Private Enterprise.”

In the final analysis, how an enterprise operates is fully as important for our productive future as what it produces or what it earns. For society’s purposes, the so-called externalities that result largely from the “hows” of enterprises doing business are intrinsic, inseverable components of their core activity. Before we spend any more time building new corporate forms and collaborative constructions, we must recognize the vast differences in the net contributions these enterprises make to society’s wherewithal and put our money where our values are. This recognition is especially critical in an era in which everyone understands the limitations of government. We can no longer cavalierly ignore the net positive or negative contributions that our enterprises make to society’s wherewithal and effectively abdicate our voting rights in this resource allocation process to financial intermediaries, the interests of whom, it would seem, diverge significantly from our own.

But Fink’s letter does not argue for corporate restructuring, a look at problematic corporate practice, or even metrics of public good by which companies’ efforts could be measured. In fact, in some sense, his recommendations follow a pattern from a letter he sent in 2014, urging fellow CEOs to invest in growth instead of share buybacks and “engage in issues of corporate governance.” The growth investments he recommended then included innovation and employee development, two areas of public impact that made their way into his 2018 letter.

Fink warns that companies who do not pay attention to the public good “will ultimately lose the license to operate from their key stakeholders” and “will remain exposed to activist campaigns that articulate a clearer goal.” The argument is not public impact for its own sake or even a publicity stunt for a populace still very suspicious of large banking and investment firms; his audience is the business community, and his message is about its continued ability to thrive. Still, that doesn’t make the letter toothless or devoid of potential for good.

One of Fink’s stated enforcement mechanisms rings a bit hollow: He reminds readers that “BlackRock can choose to sell the securities of a company if we are doubtful about its strategic direction or long-term growth,” but Bloomberg’s Stephen Gandel pointed out in the Washington Post that “BlackRock does nearly all of its stock market investing through index funds. So, no matter how much it disapproves of a company’s stance on the environment or whatever, it can’t actually sell.” Fink is more on target when he says, “our responsibility to engage and vote is more important than ever.” The Wall Street Journal advised that recent trends have “given large index-fund managers like BlackRock increasing clout on important corporate decisions such as takeovers and the fates of chief executives.”

Fink is correct: our responsibility to engage and vote, no matter where we are or for whom we work, is important. So is another recommendation, to “publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors.” Whether the value is money in an index fund or food on pantry shelves, these frameworks and a more active stakeholder engagement are good practice for creating it. If companies follow the instruction to “emphasize the importance of a diverse board,” new and newly empowered stakeholders could lead to change that is genuinely beneficial for the public.

Fink’s gesture is not without its skeptics. Gandel notes,

Last year, BlackRock and other large investors got index providers like Standard & Poor’s to bar companies with dual-share classes. If Fink is serious about social responsibility, why not at the very least push S&P to require companies, like Exxon, to disclose their social impact?

By far, Fink and BlackRock’s largest stick has to do with CEO pay. Yet, according to the last report…it rarely whacks companies and executives with it. BlackRock has voted its shares 99 percent in support of CEO pay packages of the companies in the S&P 500.

Fink and BlackRock have already pushed Exxon to disclose an environmental impact report and to allow meetings between shareholders and independent directors, in line with the more active governance role the firm expects to play.

So, do nonprofits have a large new ally in the fight for social good? Probably not; Fink seems to maintain some loyalty to Milton Friedman, tempered by a long-term understanding that everybody suffers eventually when gross social ills are allowed to fester. More likely, what BlackRock has provided is a tool for accountability and an acknowledgement that responsibility to stakeholders encompasses all the people in a community, not just the ones who give you money. But if the for-profit world is borrowing and voicing ideas about governance from the nonprofit sector, perhaps that’s an indicator of the public’s interest in real accountability among our financial institutions.—Erin Rubin