In a January 12 letter to the executives of large public companies, BlackRock cofounder and chief executive Larry Fink urged executives to engage with social concerns and pursue social purposes. He also called attention to the financial risks companies incur if they don’t consider the long-term implications of their business practices. BlackRock had assets worth $6.28 trillion under management as of December 31, 2017, so its priorities could shake up the entire investing ecosystem.
The points raised by the BlackRock letter have caught the attention of advocates, the business community, and other investors. Here’s a breakdown of five key issues, and a way to go in-depth on each of them.
“The time has come,” Fink wrote, “for a new model of shareholder engagement—one that strengthens and deepens communication between shareholders and the companies that they own.”
Shareholder engagement is a proven path to incorporating ESG principles into business decisions. Advocacy from shareholders has prompted large companies to take water management more seriously. And shareholders led six pharmaceutical firms to greenlight production of generic versions of HIV/AIDS medications.
Women in the C-Suite
Increasingly, investors care about whether businesses promote women to leadership positions and support gender diversity. Several studies have found a correlation between the presence of women on boards and better decision-making.
Fink noted the connection between diversity and sound decisions, writing: “Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset.”
The Changing Role of Index Funds
Some activists and researchers argue that the rise of passive investing is fueling income inequality, and there are studies to back up their claims. Research has found links between index funds and increased CEO pay, higher ticket prices in the airline industry, and higher fees in the banking sector.
In his letter, Fink acknowledged the concerns about index funds and how passive investing’s increasing prominence has necessitated a shift in BlackRock’s role. “Globally, investors’ increasing use of index funds is driving a transformation in BlackRock’s fiduciary responsibility and the wider landscape of corporate governance,” he wrote.
Read More: Index Funds and Income Inequality
Societal Challenges as Business Challenges
Fink spoke plainly about the business community’s responsibility to wider society: “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.”
The letter asks companies to reflect on whether they are helping workers adapt to an automated world, promoting a diverse workforce, and properly managing environmental impact.
Many commentators have noted similarities between the letter and BlackRock’s part in the success of shareholder resolutions on climate change transparency. Under Fink’s leadership, BlackRock has pressed ExxonMobil and Occidental Petroleum to improve their reporting on climate change risks. Shareholders of both companies adopted climate transparency resolutions last year with the help of BlackRock’s votes. It appears that BlackRock is leaving the sidelines and joining with other investors to demand better climate disclosure.
The Need for Inclusive Growth
The 2017 G20 Summit placed inclusive growth in the spotlight and highlighted the humanitarian and business cases for widespread opportunity. Ultimately, delegates argued, growth that benefits only a few is unsustainable. Worsening inequality can lead to societal crises and a divisive economy, in which companies battle each other for the business of a dwindling pool of affluent consumers.
Fink’s letter recognized that growth shouldn’t bolster the few at the expense of everyone else. “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate,” he wrote. “Without a sense of purpose, no company, either public or private, can achieve its full potential.”
The BlackRock letter has set an ambitious agenda. Now it’s up investors to use their influence in support of these goals.