Signalling virtue or seeking value? 5 things we learn from Larry Fink’s latest letter
BlackRock CEO Larry Fink’s annual letter last year was a call to arms for responsible capitalism. The world’s largest asset manager couldn’t have been clearer; seeking a wider social purpose is not a cost to trade off against profit; in fact, making a positive contribution to society is a prerequisite for long term prosperity. His letter was widely lauded though there remains, of course, those who subscribe to Milton Friedman’s famous doctrine that the sole purpose of business is profit. His latest letter is out and it’s fair to say he doubled down. Here are 5 things we learned.
Increasing uncertainty – political, financial and social – is creating incentives to maximise the short term at the expense of the long term
Fink’s letter is scathing about the political situation in many developed countries; describing the ‘wrenching political dysfunction’ which is exacerbating public fears and anger about their prospects. Fink’s remedy is clear; corporations must rise to the challenge, investing for the future rather than chasing short term returns.
Purpose isn’t fluffy. It’s isn’t about marketing or signalling corporate virtue – it’s about driving financial returns
Purpose is, Fink argues, ‘the company’s fundamental reason for being’ and the ‘animating force’ for achieving profits. This point is important; purpose can’t be a neat slogan pasted over a business that carries on behaving however it pleases (what’s being termed ‘purpose-washing’ in analogy to the ‘greenwashing’ environmental claims of the previous decade). True purpose guides culture, guides decision-making and ultimately sustains long-term financial returns.
It’s time for leaders to stand up and be counted
Companies can’t, Fink accepts, solve every public issue but there are many issues, from retirement to public infrastructure, that corporate leaders have to address. Companies and CEOs don’t always get it right but it’s in companies own interests to address these challenges, creating stable, engaged workforces and an economically secure population.
Younger generations will demand employers and the companies they invest in improve society
Fink quotes a Deloitte study finding that 63% more millennial workers said ‘improving society’ should be the primary purpose of business than said ‘generating profit’. As the population matures these workers will be investors; $24 trillion will pass from baby boomers to millennials. Environmental, social and governance issues (ESG) will be increasingly material in corporate valuations.
ESG is for life, not just for proxy season
In his final section on BlackRock’s own engagement priorities Fink includes a word of caution. Engagement can’t be a superficial exercise around specific proxy proposals that happen once a year. Creating genuinely beneficial outcomes requires robust, year-round dialogue. But companies shouldn’t fear that BlackRock is going to begin telling companies what their purpose should be or how to run their business. Quite the contrary, BlackRock will advocate for companies to drive their own purpose; those that do so will reap a long-term financial reward.
If you’d like to explore E, S or G and separate out the BS drop me a line.