Just prior to the global elite gathering at Davos, Larry Fink, Chairman and CEO of BlackRock investment firm wrote a letter to CEOs about the importance of long-term, sustainable strategy and understanding the social impact of the companies BlackRock and others invest in. He emphasizes that “Without a sense of purpose, no company, either public or private, can achieve its full potential.” As the largest investment firm, managing $6.3 trillion in assets, BlackRock’s message represents a social shift that blends the lines between impact investing and the profit-driven investment space. The letter sparked conversation and debate last week at the World Economic Forum in Davos where leaders across the investment, political, academic and public spheres met to discuss key global issues.
In the letter, Fink explains that in the United States and other high income countries there is a paradox: high returns for those with capital and high anxiety for millions of individuals who don’t have the capacity and resources to save for retirement. With the rise of automation, increased public scrutiny of companies moving operations overseas, and a lack of government support for retirement, infrastructure, and worker retraining, Fink contends, “Society is demanding that companies, both public and private, serve a social purpose.” Additionally, there’s a growing body of research indicating that younger generations of individuals are concerned about social challenges, with new expectations about what return on investment means. As a result, over the next three years, BlackRock plans to double the size of its investment stewardship team, which works to enhance engagement with companies, supports sustainable long-term financial performance, and protect the value of clients assets.
The letter calls for more active engagement and communication among directors, board members and shareholders. The governance model emphasizes the essential role of the board in developing a strategy for achieving long-term growth, and “helping a company articulate and pursue its purpose, as well as respond to the questions that are increasingly important to its investors, its consumers, and the communities in which it operates.” The model also calls for more diverse boards that are able to pivot when necessary and are less likely to succumb to “group thinking”.
Fink’s points about the need for improved corporate governance are relevant to financial services providers serving the world’s lower income segments. We regularly write about the pervasiveness of governance challenges for microfinance institutions and other inclusive financers, like strategic alignment between boards and senior leadership, diverse board representation, and adapting to changing environments, to name a few (see here, here and here). The Center for Financial Inclusion addresses these challenges through the Africa Board Fellowship, a program that connects and empowers board members and CEOs of inclusive finance institutions in sub-Saharan Africa through peer learning and exchange to strengthen the governance of their institutions.
Response to the letter has been vigorous, but mixed. Some feel BlackRock isn’t in a position to criticize CEOs on their social responsibility. Others point out that socially-focused investments often take longer to pay off, which challenges the deal timeline and high financial returns of the current corporate investing environment. Additionally, others assert that BlackRock, as a passive investor in index funds, is often chosen by clients because it bets on the whole market. There is concern about the attractiveness or reliability of its funds if BlackRock no longer plays a passive role but more prominently includes social considerations in investment decisions. But, as Fink put it, “profits are paramount to everything a company does” which means there have to be financial considerations, in addition to social responsibility, driving the long-term success of companies.
Regardless of how the letter will directly impact investing, we’re happy to see that it has sparked conversation about the responsibilities companies and fiduciaries have to the interests and needs of the clients they serve.
Global corporations may be having a moment of conscience, recognizing that their extended lack of attention to social impact may have contributed to the current rise of populism and anti-globilization. PayPal’s CEO Dan Schulman also used the World Economic Forum as a platform to stress a need for social performance in financial services. He argued in support of universal financial health for those underserved by the financial services industry. You can find more on that story here.
We’ll look forward to following these conversations in the weeks and months to come.
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