The man at the helm of the world’s largest investment company raised eyebrows on Tuesday with a letter to the CEOs of the biggest public companies on the globe: Be good with your business decisions, or else.
Larry Fink, the founder and chief executive of investment firm BlackRock, penned a letter to the CEOs of the companies in which his more than $6 trillion firm invests encouraging them to consider the societal implications of their business decisions and to focus on their long-term plans. “Indeed, the public expectations of your company has never been greater,” he wrote, continuing:
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.
The New York Times’s Andrew Ross Sorkin, who first reported on the letter, wrote that it is “likely to cause a firestorm in the corner offices of companies everywhere and a debate over societal responsibility that stretches from Wall Street to Washington.”
Exactly what BlackRock will be looking for when it comes to “social purpose” or “benefit” for all stakeholders, or what it will do about investing in companies that aren’t living up to those standards, isn’t yet clear from the letter.
But people are paying attention because the company controls an enormous amount of investment — according to Bloomberg, one of every three dollars investors send to fund companies in America. So even given those uncertainties, the fact that BlackRock would be so outspoken has garnered quite a bit of buzz and attention.
BlackRock manages an enormous amount of money
BlackRock is the largest investment management company in the world. The company, founded in 1988 by Fink and seven others, sells a variety of investment products, including mutual funds, exchange-traded funds, and 401(k) plans, and per its most recent quarterly regulatory filing has about $6.3 trillion in assets under management.
Like competitors Vanguard and State Street Global Advisors, the bulk of BlackRock’s investment is in passive funds that track indexes such as the S&P 500. Such funds are increasingly the default investing option for individual investors and big pension funds and own consistently growing chunks of many publicly traded large companies. In other words, BlackRock is a major power broker.
As Sorkin notes, BlackRock and companies like it have traditionally been passive investors, doing little to pressure the leaders of the companies in which they’re invested.
Activist investors, by contrast — people like Bill Ackman, Carl Icahn, and Paul Singer — seek to hold companies accountable by launching activist campaigns for change or, sometimes, selling their shares. Activists say they are looking out for shareholders by addressing lackadaisical management and pushing companies to innovate and change — they propose maneuvers such as breakups and share buybacks and often seek to get representation on boards of directors. Detractors say that activist investors encourage short-termism and prioritize making a quick buck over looking out for the companies in the long-term.
Fink has historically been critical of activist investors but has begun to soften his stance. “The role of activists is getting larger, not smaller,” he said at a conference hosted by Reuters in November, adding, “in many cases their role is a good one.”
BlackRock has urged oil giant Exxon to be more open about the effects of climate change on its business and criticized its board members’ lack of engagement with shareholders. It has also supported some activist investors in their campaigns, including Nelson Peltz at Procter & Gamble and Ackman at ADP.
In his Tuesday letter, Fink notes that in its passive investments, BlackRock has less ability to push for change beyond engaging with companies and shareholder votes at annual meetings.
But he also makes a point to say that BlackRock also manages $1.7 trillion in active funds and “can choose to sell the securities of a company if we are doubtful about its strategic direction or long-term growth.”
When someone who controls as much money as Fink does speaks, Wall Street tends to listen
Beyond active investments, Fink seems to indicate BlackRock will be taking a more proactive role in casting proxy votes at annual meetings, where shareholders can vote on a wide range of issues, including executive compensation, sustainability efforts, and directorships. BlackRock hasn’t traditionally wielded its voting power very forcefully, although in recent years that’s begun to change.
“The time has come for a new model of shareholder engagement — one that strengthens and deepens communication between shareholders and the companies that they own,” Fink writes, arguing that if engagement is to be meaningful and productive, it “needs to be a year-round conversation about improving long-term value.”
There are signals that beyond BlackRock that times could be changing when it comes to shareholders holding corporations accountable.
A majority of shareholders in Exxon and Occidental Petroleum, for example, recently voted in favor of the companies assessing the impact of climate change on their businesses. More broadly, socially responsible investing has been on the rise and, along with it, more attention from shareholders on how what companies do might affect the world around them.
It’s not clear what exactly BlackRock is looking for — or what they’ll do if they don’t find it
Fink makes some reference to where he believes companies should be focusing in their long-term strategies — items such as wage growth, automation, and climate change — but exactly what he is looking for, or what BlackRock intends to do about it, is largely unclear. He also doesn’t downplay the importance of profits but instead seems to imply money-making and acting with a responsibility to society are intertwined.
The letter could be read as a threat not to invest in companies that behave badly, especially given Fink’s point that BlackRock has $1.7 trillion in active investments. But it’s also not clear how Fink defines good and bad behavior, and he does not overtly outline what the consequences may be.
“For the world’s largest investor to say it aloud — and declare that he plans to hold companies accountable — is a bracing example of the evolution of corporate America,” Sorkin writes, noting that BlackRock is adding staff to hold companies accountable.
Some investors haven’t been so receptive of Fink’s message. Sam Zell, a billionaire investor who founded investment firm Equity Group Investments, in an appearance on CNBC on Tuesday said Fink is “extraordinarily hypocritical” in pushing social responsibility. “Either they’re a passive fund that follows the market or they’re a leader that’s setting the tone,” he said, arguing that BlackRock can’t have it both ways. “I didn’t know Larry Fink had been made God.”
Ultimately, the impact of Fink’s letter and BlackRock’s supposed shift in thinking won’t be about words in a letter to CEOs — it will be about the firm’s actions.
“I appreciated today’s letter, particularly the encouragement not to ‘succumb to short-term pressures to distribute earnings,’” said Rosanna Landis Weaver, program manager at shareholder advocacy group As You Sow, which promotes environmental and social corporate responsibility, in an email, adding that she took his words to be a reference to stock buybacks and dividends — measures often designed to placate shareholders without boosting the long-term value of a company.
But, she said, the larger issue in her view is executive compensation and how much corporate executives are paid. “BlackRock has a poor record on voting on exorbitant compensation plans, we hope that will change,” she said. “I have no reason to doubt Fink’s sincerity, but the ‘proof is in the pudding,’ and the only view we have of the pudding is the voting.”