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World’s largest money manager to CEOs: You must do well for society

More than 1,000 global CEOs received a letter Tuesday from one of the world’s most authoritative money managers with a pointed message: Easily posting good financial returns is no longer enough. You must have a positive impact on society, too.

In his annual letter to CEOs sent Tuesday, Laurence Fink, the chairman and CEO of BlackRock, which manages nearly $6.3 trillion in investments, put CEOs on high alert that they would be expected to answer questions about their long-term strategy, how they plan to use savings from the tax reform law, what role they play in their communities and whether they are making a diverse workforce that is being retrained for opportunities in a more automated future.

“Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote in his letter, which was first reported by the New York Times. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Fink’s letter utilized stronger language, experts said, than his recent annual letters to CEOs, which have focused on long-term strategies and the environmental, social and governance practices (often called “ESG” factors) of the companies in which they invest. In this year’s letter, Fink said he would double the size of BlackRock’s team that enlists with companies to try to get them to do more on such problems.

“We are seeing a paradox of high returns and high anxiety,” Fink wrote, expressing concern about income inequality, infrastructure and automation. “Since the financial crisis, those with capital have reaped huge benefits. At the same time, many personals across the world are facing a combination of low rates, low wage growth and inadequate retirement systems.” He noted the growing expectation that the private sector play a role in resolving concerns, writing that “we also see many governments failing to prepare for the future.”

The letter appears amid a greater recognition in corporate boardrooms and money management offices about the importance of problems like climate change, leadership diversity and income inequality for the long-term health of the bottom lines of companies. One recent survey by the investment consulting firm Callan found that just 39 % of investors said the payoff for considering ESG problems in investment decisions was unclear, down from 63 % in 2016. Once the domain of socially responsible mutual funds or a major focus of activist pension funds, such factors have grabbed the attention of a broader array of shareholders as they evaluate where to invest.

“We utilized to talk about ‘social investing,’ which made it sound like we were talking about a debutante pavillion,” said Nell Minow, vice chair of the governance consulting firm ValueEdge Advisors. Now, Minow said, as such problems have gotten new vocabulary and focus from more investors — and as the government is increasingly rolling back its involvement in issues like climate change — there’s a greater expectation that private sectors pick up the slack. “It’s a mistake to think there’s any tradeoff here between financial returns and social goals. All of this is very much partition in to making sure that the company makes money.”

“Passive” investments such as index funds or exchange traded funds allocate investments to a whole market index or industry. Unlike managers of actively managed funds, where managers buy and sell stocks, passive money managers are not capable to sell the shares of companies with which they disagree. (Some $4.5 trillion of BlackRock’s $6.3 trillion in assets under management are passively managed.) But they can vote their shares against sloppy directors, hold meetings with board members to discuss their disagreements, and vote their shares on investor proposals that goal to change other practices, such as outsized CEO compensation or a company’s environmental policies.

The presumption is that Fink’s letter could open the door for BlackRock — and other big money managers — to more frequently vote against management’s wishes when shareholders push for such changes if discussions don’t produce the needed results. In the past, BlackRock and others have been criticized for siding hugely with management; according to data reported by Morningstar, the investment giant voted with management 91 % of the time over the past three years. One pension fund put BlackRock on a “watch list” a year ago for what it called its “reticence to oppose management” and “inconsistency between their proxy voting record with their policies and public pronouncements.”

(A BlackRock spokesman declined to comment on that criticism but said in an emailed statement that “we are willing to be patient with companies when our engagement affirms they are working to address our concerns” but that if no progress is seen, “we will vote against management.”)

Yet in 2017, BlackRock, along with other big money managers, sided with shareholders for the first time on proposals about gender diversity on the board and others related to climate change. One of those instances was at ExxonMobil, where it cast its shares this year against the oil giant on a measure instructing the company to disclose more on its climate change efforts.

Some observers raised questions about Fink’s letter. Charles Elson, the director of a corporate governance center at the University of Delaware, asked how BlackRock would measure the concept of societal good: “What type of metric do you come up with, and how do you act on that metric? And what happens if that metric affects long term value to the negative?”

The impact of the letter will depend, of course, on how much “muscle” BlackRock puts behind the letter’s demands, Minow said. If it holds managers answerable, and votes when it needs to against proposals, its heft and influence could make real change.

“If you’ve got like 5, 10 or 15 % of the holdings, [management] is going to pay attention,” said David Larcker, a professor at the Rock Center for Corporate Governance at Stanford University. “They’re not going to blow it off when an investor like that appears forward. It ratchets up the debate to a very serious level.”

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