March 11, 2021
March 11, 2021
In its January 4, 2019 edition, the Financial Times’ US business editor, Andrew Edgecliffe-Johnson, made the following observation: “If Milton Friedman’s seminal 1970 article in the New York Times provided the intellectual firepower for the idea that a public company’s only social responsibility was to increase its profits, the catalytic text for the new era of purposeful capitalism was the letter sent to chief executives in 2018 by BlackRock’s Larry Fink.” With reported assets under management of $6.3 trillion, Blackrock is the world’s largest investor in public companies, and thus carries enormous clout. In that 2018 letter to the CEOs of portfolio companies, Fink wrote that the failure of government to provide long-term solutions had spurred a growing number of constituencies to look to corporations to deliver not only financial performance, but a positive contribution to society, benefiting customers and communities as well as shareholders. Without a social purpose, Fink reasoned, companies fail to make the investments in employees, innovation, and capital expenditures needed for long-term growth—and above-par returns to the likes of institutional investors such as BlackRock.
Since then, BlackRock (public since 1999 when it opened at $14 per share) has faced pressure from its own stakeholders, underscoring just how fraught such relationships can be. One example: After the massacre of students at Marjory Stoneman Douglas High School in Parkland, Fla., on Feb. 14, 2018, gun control advocates questioned BlackRock’s holdings in weapons manufacturers and retailers. The asset manager (whose share price on the day of this writing was $756.45) responded that because weapons makers are rolled into index funds, the makeup of which is determined by third parties, BlackRock would offer alternative products that exclude firearms makers. It also vowed to engage with gun makers differently, asking, for instance, what actions they take to promote the safe and responsible use of their products.
While in some respects the investor scrutiny of corporations started as soon as businesses began using other people’s money to support their ambitions—at least as far back as 1600 with the formation of the East India Co.—what’s noteworthy about this point in time is that once-passive institutional investors including BlackRock, Vanguard, and State Street Global Advisors have in recent years become more active, in effect using their clout to seek changes. The focus on stakeholder capitalism has intensified due to other factors including increased disclosures required by regulators and other watch dogs; the influence of proxy advisors in their recommendations on, say, director elections; and the passage of landmark legislation in the aftermath of corporate failures that upped the ante first for the audit committee (post-Enron with the passage of the Sarbanes-Oxley Act of 2002), then for the compensation committee (post-financial crisis with the enactment of Dodd-Frank), and likely for the nominating and governance committee as a new Congress considers various resolutions.
For some directors, concerns front and center on their meeting agendas may be largely dependent on the life stage or reach of the business. Yet, some governance issues resonate across industries and therefore must be given careful consideration by all boards; these include employee and customer activism, the effects of civil injustice and human rights, executive compensation and its proportionality to the pay of the average worker, the risk of a cybersecurity breach exposing sensitive or personal information, and data privacy more generally.
For this article, I reached out to directors and officers who understand the intrinsic link between purpose and profit and the tension in balancing each amid rapidly changing business dynamics. Like the yin and yang symbol that features prominently on our January/February 2021 cover image, there can be no profit without purpose and no purpose without profit.
NACD: Tools and resources to help guide you in unpredictable times.