January 25, 2019
January 25, 2019
“Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked.”
So wrote BlackRock founder, chair, and CEO Laurence D. Fink in his recently released 2019 letter to CEOs of the asset manager’s portfolio companies. And yes, it appeared in bold-face type. The letter, which was published January 17 on the BlackRock website, comes at a time of great uncertainty and at a time when managers, boards, and investors increasingly embrace the theory of stakeholder, not shareholder, primacy. In essence, Fink is calling for boards to oversee the management of business for the long term, and to do so by aligning profits with purpose. Fink specifically wants management and boards to articulate how their purpose informs their strategy, and to explain that linkage to investors.
This is becoming well-trod territory. While the dueling theories of stakeholder versus shareholder continue to bifurcate some boards and management, there has been a steady increase in the rise of companies who align purpose and profits. Such companies as The Container Store, Campbell Soup Co., and PepsiCo—to name but a few—have taken the stakeholder theory to the very core of their businesses.
Arguing for long-term value creation and the alignment of mission, purpose, and strategy is hardly new. In fact, NACD has been advocating for and tracking the progress of long-term value creation theory for decades, and our Blue Ribbon Commission reports and surveys demonstrate that.
What’s different about Fink’s appeal—in addition to his outsized influence given the massive sums of other people’s money managed by the 30-year-old BlackRock—is the context for his latest appeal. The fragility of the global landscape, Fink writes, makes corporations and governments alike more susceptible to short-term behavior. Combine that with a growing distrust of governments and the proclivity of younger generations such as millennials to hold the companies they work for, buy from, and invest in to a higher purpose, and what results is rocket fuel for the theory of stakeholder versus shareholder primacy.
Fink’s 2019 letter builds on the mandate from his 2018 CEO letter for corporate management to construct a strategic framework for long-term value creation that can be articulated by management and the board alike to investors such as BlackRock. “In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth. I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company.”
That also echoes the findings and recommendations of the 2015 NACD Blue Ribbon Commission Report on the Board and Long-term Value Creation. And indeed, Fink’s 2018 letter may have had a real impact. Board oversight of long-term strategy is now the top priority in discussions between boards and institutional investors, based on NACD’s most recent survey of public company directors.
As Fink implores in this year’s letter, the world needs business leadership: “As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity.” In order to put its money where its mouth is, BlackRock takes an engagement-first approach to its investments. Its engagement priorities this year, according to Fink (and in this order), are: “governance, including your company’s approach to board diversity; corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management.”
Also contributing to a focus on environmental, social, and governance (ESG) issues is the growing popularity of Certified B Corporations. B Lab was started in 2007 as the certifying agency for companies “that meet the highest standards of verified, overall social and environmental performance, public transparency, and legal accountability to balance profit and purpose.” B Corp companies now include Danone North America, Patagonia, Gap subsidiary Athleta, and the Unilever-owned Seventh Generation and Ben & Jerry’s.
The B Corp model also reportedly helped inspire Sen. Elizabeth Warren (D-MA) to propose the Accountable Capitalism Act that would require companies with revenues over $1 billion to consider the interests of employees, customers, and their communities alongside those of investors. Warren earlier this month announced a run for the Democrats’ 2020 presidential nomination. As one commentator wrote, the stakeholder versus shareholder primacy debate could soon be aired on prime time.
And let us not forget legal titan Martin Lipton. The founding partner of Wachtell Lipton Rosen & Katz published “The New Paradigm” in 2016, which, at the behest of the World Economic Forum, provided a road map for long-term value creation aimed at companies, asset managers, and investors. One of the paradigm’s precepts for management and boards was to: “Set high standards for the corporation, including with respect to human rights, and the integration of relevant sustainability and environmental, social and governance (‘ESG’) and corporate social responsibility (‘CSR’) matters into strategic and operational planning for the achievement of long-term value.”
While Fink is hardly the first to endorse corporate purpose, BlackRock’s cadre of 30 or so investment stewards have begun speaking to companies about how their purpose aligns with culture and corporate strategy. “We have no intention of telling companies what their purpose should be—that is the role of your management team and your board of directors,” Fink writes in the 2019 letter. “Rather, we seek to understand how a company’s purpose informs its strategy and culture to underpin sustainable financial performance.”
Forewarned is forearmed.