January 24, 2019
Last year, Larry Fink’s annual letter to CEOs forged its way into public and corporate consciousness. In it, Fink, chief executive officer of BlackRock Inc., the world’s largest investment firm, made the bold declaration that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” A direct riposte to Milton Friedman’s 1970 argument that “the social responsibility of business is to increase its profits,” Fink’s statement rapidly appeared in thousands of articles and PowerPoint slides. Suddenly, every business meeting I attended featured a conversation about the implications of the “Larry Fink letter.” The mainstream business press is still debating the questions Fink raised.
This year’s highly anticipated letter from Fink appeared on January 17, reiterating and expanding upon many of his 2018 points. Its advice to business reflects sustainability best practice and is fantastic news for anyone with concerns about today’s social disruption and environmental destruction. Here are our four main takeaways:
It’s such a big deal that it spawned a hoax—which people fell for
An activist group called the Yes Men released a spoof letter the day prior to the publication of the official document, saying that BlackRock would begin treating companies that do not adhere to the Paris Climate Agreement as “sin stocks”—like purveyors of tobacco and weapons. It is hard to overstate how significant such a move would be for companies and for the environment; as Fink subsequently showed, BlackRock is not ready to put its money where its mouth is to such an extent. Nonetheless, publications including the Financial Times were fooled by an idea that they would have deemed utterly implausible coming from BlackRock just five years ago. So the reaction to the hoax letter proves two things: Responsible investment possibilities are expanding at an accelerating rate, and the debate over the future of corporate responsibility is now sufficiently mainstream to spawn its own fake news.
“Purpose” is happening, whether we like it or not
As a corporate responsibility practitioner, I tend to roll my eyes when I hear the term “purpose.” A 2017 survey indicated that although businesses are highly enthusiastic about it, there is no consensus as to what “purpose” actually means. Fink uses the term 21 times in his 2019 letter and defines it as “a company’s reason for being,” a statement unlikely to clarify matters. He equates purpose with long-term value creation and hails it as an “animating force” for achieving profits via a stronger strategy and culture, not as a detriment to growth.
Fink also quotes a survey wherein by a 63 percent margin, millennials agree that the primary purpose of business should be to improve society, rather than generate profits—and then skates past tough questions as to whether and when these goals might conflict. It is the time horizon of corporate planning that he takes aim at, arguing that stakeholder trust and social responsibility offer the only path to profitability over the long term. This might leave companies wondering how they should address his calls to provide workers job and retirement security in the context of aging and automation, not to mention the very future of our economic models in an era of global warming and resource scarcity. This debate will inevitably continue.
Questions about implementation are growing louder
The chorus of questions about how BlackRock translates its position into meaningful action lost no volume in 2018. The 2017 proxy season saw both Vanguard Group and BlackRock support two climate-related shareholder proposals; this was a big step, but there were a total of 90 on corporate tables. BlackRock has also struggled to navigate the gun control debate; it divested from gun manufacturers but went on to exclude from ESG funds even retailers that had acted to make it harder to purchase guns in the aftermath of the Parkland, Florida, shootings.
BlackRock aims to effect change through engagement and discussion with companies, not hostile shareholder resolutions—and it has cause to argue that this is working. The 2018 proxy season saw far fewer shareholder proposals on climate, precisely because the energy and extractives sector is shifting its approach in an attempt to anticipate and respond to pressure.
So are questions about the interaction between business and politics
Fink explicitly calls on business to solve societal challenges that have been left unaddressed by governments. As the credibility and functionality of political systems across the world faces ever-more-extreme pressures, it is tempting and comforting to view corporate scale as the answer to many pressing challenges we face. Nonetheless, Fink’s efforts raise important questions about the rapidly escalating power of corporate boards, not to mention the future of democracy in an environment where we look to corporations instead of governments to solve our problems. There are strong counter-arguments that business should focus its attention on the murky worlds of lobbying and tax avoidance, pushing for regulatory capacity and action rather than expanding into territory being vacated by today’s governments.
This year’s BlackRock letter marks a further step forward in an increasingly high-stakes debate about the future of the corporation and its nascent shift from shareholder value to stakeholder trust, from risk to impact, and from growth to sustainability. As ever greater numbers of influential people seek answers to the questions Fink raises, the pace of change is accelerating. I’m already looking forward to next year’s letter.
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