In his annual letter released to CEOs, BlackRock founder and CEO Larry Fink stated that companies must work toward a goal of social responsibility or accept the risk of an increasingly polarized and economically-insecure society turning against them.
“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,” wrote Fink.
Fink, who oversees the world’s largest investment firm, said that BlackRock would take a more active role in encouraging companies to create long-term strategies to contend with the negative impact of rapid technological progress and other pressing issues.
“Your company’s strategy must articulate a path to achieve financial performance. 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,” Fink wrote.
Through doubling the size of its investment stewardship wing, Fink said that BlackRock will facilitate “deeper, more frequent and more productive conversations” about how corporate leadership can influence meaningful change in boardrooms and shareholder meetings.
Fink used the recently-passed U.S. tax cut plan as an example of how companies could do more to explain how they will spend their tax savings for the greater good. While economists say the highest-earners will benefit most from the tax cut, there are multiple warnings of how it will increase the national debt by $1 trillion and threaten federal funding of social safety net programs. Fink asked how they will reconcile their short-term profits with long-term goals.
“Tax changes will embolden those activists with a short-term focus to demand answers on the use of increased cash flows, and companies who have not already developed and explained their plans will find it difficult to defend against these campaigns,” Fink wrote.
Fink also criticized the “many governments” which are failing in their duty to adequately prepare for the future. Fink wrote that “society is turning to the private sector” for solutions for worker retraining programs, retirement security, and infrastructure spending.
BlackRock, which manages $6.3 trillion in assets, has the heavyweight power to influence CEOs to think beyond profit gains for shareholders and consider how their companies can affect positive change. Whether Fink’s letter will have a lasting impact or not was debated in the ensuing news cycle after news of the letter’s release broke.
Jeffrey Sonnenfeld, senior associate dean at Yale School of Management, told The New York Times that Fink’s letter is unprecedented and that it “is huge for an institutional investor to take this position across its portfolio.” He said that the letter is a “lightning rod” and will influence other asset managers to act accordingly.
BlackRock’s portfolio is stocked with the top performing companies which contribute to its continued success. In an op-ed for Money Stuff and Bloomberg, columnist and former Goldman Sachs investment banker Matt Levine wrote that it was unclear which public companies would suffer consequences from this increased scrutiny.
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Fink’s call to action joins the groundswell of awareness of the social problems that affect our collective future. More importantly, it signals that this message is getting through to the top echelons of society.
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