Larry Fink, the CEO of BlackRock just sent an open letter to the CEOs of publicly traded companies outlining his expectation for how these companies engage with society and act as good corporate stewards.
The letter tells companies that they need to stop with the myopic quarterly earnings focus, and instead serve a broader social purpose benefiting all stakeholders, including the communities they operate in.
This might sound like a non-event, but it likely will have a lasting impact on the public markets, and corporate culture overall.
Why does it matter?
Larry Fink may not be a household name, but BlackRock the company he runs, manages more than $6.2 trillion in customer assets. BlackRock is generally viewed as the world’s largest asset manager.
What that means is that BlackRock has a significant amount of power when it comes to controlling the flow of that $6.2T of client funds. Where the rubber hits the road: when BlackRock talks, the executive teams and boards of public companies listen.
They do so because they know that ignoring BlackRock’s guidance comes at the risk of divestment–which could adversely impact their share prices and their job security.
In short, what Mr. Fink says, matters. A lot.
What was BlackRock’s message?
You can read the full letter here. The highlights are that Blacklock expects companies to serve a positive social purpose in society–not one solely focused on quarterly profits.
These paragraphs below capture the gestalt of the letter.
We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. 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. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate….
…In the current environment, these stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process…
…Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that that will help them achieve their goals?
In summary, companies must have a vision for the future that not only generates value for their shareholders but adds value to stakeholders throughout society.
If you don’t aim to make this a practice, BlackRock will see that as a failure of leadership and it may impact investment decisions involving your company.
Will it have a lasting impact?
Probably. Obviously, no one can predict the future but there are $6 trillion reasons to believe Mr. Fink’s message is credible.
Controlling a significant percentage of the world’s total investment assets increases the likelihood that even the purest capitalist will pay heed.
Is it good?
Yes. This letter serves as a significant push from a powerful executive and the world’s largest asset manager to make companies more accountable to the communities they operate in.
Obviously, this letter will not solve all of the issues it listed overnight, but it is a clear shot across the bow to public companies that they must evolve to take these broader societal issues into consideration or risk irrelevance.
In many ways, Larry Fink has just encouraged everyone to take a look at the impact their money has.
Regardless of who is doing it, we support the trend of having intention with your money and using it to help build the world you want to see. As more and more investors take up this approach we believe it will make the world a better place.
We encourage you, the reader, to reflect on this personally as well. Is your money building the world you want to live in?