In this year's annual letter to CEOs, BlackRock CEO Laurence Fink once again advocates the importance of a long-term approach, at the same time mourning the prevalence of political dysfunction and acknowledging the resulting increase in public anger and frustration: "some of the world's leading democracies have descended into wrenching political dysfunction, which has exacerbated, rather than quelled, this public frustration. Trust in multilateralism and official institutions is crumbling." For a moment, I thought he was going to veer off into "American carnage," but instead his focus is on the responsibility of corporations to step into the breach: "Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others."
You have to admit that Fink's newest call to CEOs represents quite a turn of events, especially when taken together with last year's letter advocating that companies recognize their responsibilities to stakeholders beyond just shareholders—to employees, customers and communities. (See this PubCo post.) In decades past, the stereotype of the business executive was a Republican in a tidy gray suit focused solely on the bottom line, while government was viewed as the entity fulfilling the social contract, caring for the elderly and the sick, addressing issues like inequality and the environment and expressing moral and political outrage when the appropriate time came. With current government essentially stymied or withdrawing from those functions, the tables have turned and now, in many cases, institutional holders and corporations have become engines promoting—albeit with baby steps—corporate social responsibility. (See, e.g., this PubCo post on gun safety, this PubCo post on climate change, this article on CEOs boycotting the Davos-in-the-desert conference and this PubCo post on board gender diversity.)
Fink frames his letter as a discussion of the concept of corporate "purpose." What does Fink mean by "purpose"? It is, he says, "a company's fundamental reason for being—what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them." He insists that his focus on purpose is not inconsistent with profits; rather, in his view, purpose drives long-term profitability by providing a whole catalogue of benefits: promoting "strategic discipline"; unifying management, employees and communities; advancing ethical behavior; creating "an essential check on actions that go against the best interests of stakeholders"; guiding culture; and providing "a framework for consistent decision-making, and, ultimately, help[ing] sustain long-term financial returns" for shareholders.
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A 2014 survey by Deloitte, which addressed the connection between a strong sense of purpose and higher levels of business confidence, might provide additional insight on the meaning and impact of corporate "purpose." The survey sampled 1,053 adults (including 300 executives and 753 workers employed by companies with at least 100 employees). When respondents were asked about the types of activities that formed parts of the "purpose " of their companies, the vast majority cited "providing business services that have a meaningful impact on customers (89%) and on society (84%)." Another 77% included as part of purpose "providing employees with education, experience and/or mentorship benefits." In addition, 74% cited "encouraging employees to volunteer," 69% cited generating financial returns for shareholders, 59% said donating to non-profits and 50% cited providing pro bono work and skills-based volunteerism.
Respondents at companies with a strong sense of purpose were confident of their companies' growth in the coming year compared with respondents at companies without a strong sense of purpose (82% compared with 48%). Respondents at companies with a strong sense of purpose cited these factors most often as reasons underlying their confidence: "commitment to delivering top quality products/services (65%), focus on long-term sustainable growth (55%), and clear understanding of organization's purpose and commitment to core values (48%). By comparison, respondents at companies without a strong sense of purpose cited "focus on the bottom line (69%) and short-term returns (52%). Respondents who were not optimistic cited "a lack of commitment to employee development and retention (57%), short-term focus of leadership that sacrifices long-term growth (56%), and lack of experienced leadership with proven track record (47%). In addition, companies with a strong sense of purpose were more often characterized as likely to increase investment in new technologies (38% v. 19%), new markets (31% v. 21%), new partnerships or acquisitions (31% v. 18%), new products and services (27% v. 17%) and employee development and training (25% v. 11%).
With regard to other stakeholders, such as customers, employees, communities, investors and regulators, 89% of respondents at companies with a strong sense of purpose indicated that their clients "trust that they deliver the highest quality products and services" compared with 66% of those employed where there is no strong sense of purpose. Respondents at companies with a strong sense of purpose said that employees are fully engaged with the company (73% v. 23%) and trust in the company's investment in their professional development (71% v. 24%). The survey also showed that companies with a strong sense of purpose "are more likely to embrace diversity and different opinions, encourage innovation among employees, and provide the tools and resources for employees to realize their full potential."
Fink acknowledges that CEOs feel the pressure of various stakeholders (including employees) to "wade into sensitive social and political issues—especially as they see governments failing to do so effectively," and that what is right for one company may not be right for another. Nevertheless, in the absence of action from government, he contends, "the world needs your leadership." Although companies can't solve every problem, in some cases, the problem can't be solved without companies' leadership. One example he provides is retirement, given that the shift to 401(k) plans has left many workers largely unprepared for retirement. No specifics are offered, but Fink suggests that companies must "embrace a greater responsibility" to help workers navigate this issue, with the goal of making the workforce more stable and engaged and the local community more secure.
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This NYT article about Microsoft presents a perfect illustration of Fink's thesis—a company recognizing its surrounding community as an important stakeholder and, in the absence of government action, attempting to address a signficant problem in that community. The article concerns Microsoft's pledge to invest $500 million to help build affordable housing in the Seattle community, which, the article suggests, seeks to remedy "a nationwide void in addressing the problem." The article notes that the company is not just cutting checks to charities or creating housing only for its own employees, a more typical route for companies; "[r]ather, Microsoft is trying to help fix a market failure—a job government typically does." As the article observes, "the fact that a tech company has to step in to help ensure the development of affordable housing points to a long-building reality nationwide: The federal government has largely retreated from this role." In the 1970s, the article reports, the government spent about three times more on housing programs than it does today, and "funds to repair the remaining public housing stock have been cut in half over the last 15 years." In addition, costs for land and building in the region have grown at a steep pace, while wages, especially for lower skilled workers, have not followed suit. According to the article, activists "in communities like Seattle have made a strong case that tech companies bear some responsibility for making the housing crisis worse. Those companies have brought thousands of highly paid workers into housing markets that don't have room for everyone. But among the many culprits behind the crisis, the government's retrenchment is critical, too."
Of course, not everyone shares Fink's view. As reported in the NYT's DealBook column, one real estate billionaire (not the one in the White House) commented that "I didn't know Larry Fink had been made God," and Warren Buffett, the chair of Berkshire Hathaway, said that he didn't "believe in imposing my political opinions on the activities of our businesses."
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In that same vein, Matt Levine's column in Bloomberg, engages in a flight of fancy, raising a question about the allocation of so much power to this
"small set of large and diversified institutional investors.... John Coates calls this the 'Problem of Twelve,' 'the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.' The thing is, though, that if you find the 'Problem of Twelve' sort of creepy and unsettling when applied to issues of corporate governance and profitability, isn't it even weirder when applied to, like, the environment, or the social contract for U.S. workers? ...What if large public companies are the most effective locus of political power in the world today, and what if Larry Fink is one of the most influential people at a lot of large public companies, and what if he decides to use his influence and those companies' power to do things that would once have been the responsibility of governments? What if Larry Fink has been elected to a position of vast political power, not by the old-fashioned mechanism of people going to the polls and giving him their votes, but by the new, late-capitalist mechanism of people giving him their money to manage?"
Fink observes the trend toward corporate social responsibility will only accelerate as the millennial generation increases its proportion of the workforce. As evidenced by recent activity, including walkouts over the past year, employees have not been afraid to express "their perspective on the importance of corporate purpose," and Fink expects this trend to continue. Future transfers of wealth from boomers to millennials should also accelerate investor focus on issues of ESG.
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