BlackRock’s Message: Contribute to Society, or Risk Losing Our Support – The New York Times

BlackRock’s Message: Contribute to Society, or Risk Losing Our Support

 

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Laurence D. Fink, the chief executive of BlackRock, will tell companies they need to contribute to society to receive his firm’s support. Credit Damon Winter/The New York Times

On Tuesday, the chief executives of the world’s largest public companies will be receiving a letter from one of the most influential investors in the world. And what it says is likely to cause a firestorm in the corner offices of companies everywhere and a debate over social responsibility that stretches from Wall Street to Washington.

Laurence D. Fink, founder and chief executive of the investment firm BlackRock, is going to inform business leaders that their companies need to do more than make profits – they need to contribute to society as well if they want to receive the support of BlackRock.

Mr. Fink has the clout to make this kind of demand: His firm manages more than $6 trillion in investments through 401(k) plans, exchange-traded funds and mutual funds, making it the largest investor in the world, and he has an outsize influence on whether directors are voted on and off boards.

Society is demanding that companies, both public and private, serve a social purpose, he wrote in a draft of the letter that was shared with me. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.

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It may be a watershed moment on Wall Street, one that raises all sorts of questions about the very nature of capitalism. It will be a lightning rod for sure for major institutions investing other people’s money, said Jeffrey Sonnenfeld, a senior associate dean at the Yale School of Management and an expert on corporate leadership. It is huge for an institutional investor to take this position across its portfolio. He said he’s seen nothing like it.

In a candid assessment of what’s happening in the business world  and perhaps taking a veiled shot at Washington at the same time  Mr. Fink wrote that he is seeing many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. He added, As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.

It is a refrain that we’re hearing more and more from various pockets of the business community, and in fact last year company leaders found themselves taking stands on issues like immigration policy, race relations, gay rights and more.

But 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. Mr. Fink says he is adding staff to help monitor how companies respond; only time will tell whether BlackRock truly uses his firm’s heft to influence new social initiatives.

Part of Mr. Fink’s argument rests on the changing mood of the country regarding social responsibility. He contends that if a company doesn’t engage with the community and have a sense of purpose it will ultimately lose the license to operate from key stakeholders.

Companies often talk about contributing to society  sometimes breathlessly  but it is typically written off as a marketing gimmick aimed at raising profits or appeasing regulators.

Mr. Fink’s declaration is different because his constituency in this case is the business community itself. It pits him, to some degree, against many of the companies that he’s invested in, which hold the view that their only duty is to produce profits for their shareholders, an argument long espoused by economists like Milton Friedman.

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A view of BlackRock’s offices in Manhattan. The giant investment firm has begun siding with activist investors. Credit Justin Lane/European Pressphoto Agency

What does it mean to say that business has responsibilities? Only people can have responsibilities, Friedman wrote, almost rhetorically, back in 1970 in this very newspaper. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.

 

Until recently, companies like BlackRock have traditionally been passive investors and have done little to pressure the leaders of companies they invested in; in fact they were known for rubber stamping management’s plans. It was active investors who sought to hold companies accountable either by agitating for change or by selling their shares to express their displeasure.

Indeed, Mr. Fink has in the past denounced activist shareholders as too focused on the short term. If you asked me if activism harms job creation, the answer is yes, he told me back in 2014. Now he is changing his stripes.

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