On Jan. 16, 2018, Larry Fink, founder and chief executive of the investment firm BlackRock, issued his annual letter to the CEOs of publicly traded companies. In a way, the 2018 edition was a culmination of the theme that has slowly emerged from Fink’s previous letters—corporate executives need to better articulate a vision for how they will create long-term value for their company and society as a whole.
In his most recent letter, Fink spares few words in arguing that companies can no longer be managed solely to maximize shareholder value. Instead, companies “must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
The Response to Fink
Being released just before the World Economic Forum annual meeting in Davos, Switzerland, Fink’s letter drew a fair amount of attention and fed into the broader debate around the role of companies in society, particularly around the concept of “purpose.” As Matt Turner of Business Insider astutely noted, the response to Fink’s assertion can be broken down into three camps:
- Those who agree wholeheartedly. This is the “Larry’s right” group. They see Fink’s letter as making a bold statement on the need for a better version of capitalism.
- Those who question whether there’s a friction between a “positive contribution to society” and financial performance. You could call this the “Yes, but …” group. The argument here is that these social-impact investments often take a long time to pay off, and in the meantime, the CEO could lose his or her job.
- Those who question whether it’s BlackRock’s place to tell CEOs they need to make a “positive contribution to society” and whether doing so is straying into the world of politics. This is the “Pissed off” group.
Unfortunately, this debate about whether or not Larry Fink is “right” or “wrong” misses some very important and substantive points about whether companies are making an appropriate investment in the future of our society and where their investment is most needed and best directed.
A significant misinterpretation of Fink’s letter is that it is a call for companies to spend more money on CSR and philanthropy. According to Judith Samuelson of the Aspen Institute, “Fink is not asking companies to engage in more philanthropy. We cannot meet the challenge of today with charity or workplace volunteerism. Instead, we require a solid new foundation for business operations and decision rules, and that requires change in both the C-suite and board rooms.”
Rationale for Investing in Human Capital
If companies truly want to act with purpose, and do so to the benefit of all stakeholders, the place they must start is with employees. Specifically, there is research showing that the efforts by large companies to hold the line on employee compensation and outsource traditional “back office” duties are significant contributors to wage inequality that has pervaded much of the global economy. As Samuelson pointedly noted, “Efficiency and cost reduction cannot come at the expense of financially healthy employees and communities if we are going to rebuild trust in the business system.”
There are three reasons why companies should first look inward if they are serious about creating long-term value for society. First, as noted, the wages companies pay appear to have a direct impact on the economic health of society. So, if a company wants to have a broad impact on society without creating a plethora of CSR of philanthropy programs, adjusting its pay scale upward is a good place to start.
Second, and of direct relevance to Larry Fink’s argument, a recent white paper by Just Capital explored the drivers of the risk and return characteristics of publicly traded companies in its America’s Most Just Companies ranking. Of note, the Just Capital research found that “Worker Pay and Job Creation, show strong relationships in the direction of higher [investment] alpha.” In other words, companies that invest in their employees provide a greater return on investment for investors because, in part, they create long-term value.
Third, in public opinion research conducted by Hudson Pacific for Handshake, it is clear the American public closely evaluates the reputation of a company based on how well it invests in its employees. Investing in the “human capital” of employees is valued more by the American public than a company’s financial performance, leadership by the executive team and or its engagement in a community. In other words, Americans fully expect companies to be paying their employees a decent wage, providing job training and offering a competitive benefits package.
The Way Forward
To his credit, Larry Fink’s efforts to get companies more engaged in creating both long-term value for shareholders and sustainable value for society are paying dividends. Not only do CEOs appear to be taking heed, but arguably, their most powerful constituency—institutional investors—also are more actively evaluating their investments based on their contributions to society.
The challenge is to take the growing awareness of the holistic approach to long-term value creation and turn it into meaningful policies that have a tangible impact far beyond the company itself.