This week, Blackrock CEO Larry Fink's annual letter to CEOs made international headlines with its emphasis on the corporate role in society as being necessary to the effective execution of a long-term value creation strategy, while introducing an expanded engagement strategy to hold companies accountable for long-term strategy. "Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society," notes Mr. Fink in an opening paragraph.
The letter also explains the basis for BlackRock’s "New Model for Corporate Governance" and emphasizes BlackRock's responsibilities as an owner and a steward. The letter notes that as an index fund holder, “if engagement is to be meaningful and productive – if we collectively are going to focus on benefiting shareholders instead of wasting time and money in proxy fights – then engagement needs to be a year-round conversation about improving long-term value.
To help accomplish this, Mr. Fink notes that BlackRock is further expanding its global stewardship team to augment its shareholder engagement capabilities, with BlackRock Vice Chair and co-founder Barbara Novick overseeing the firm’s investment stewardship efforts and Michelle Edkins continuing to run the global investment stewardship group.
As he has in the past, Mr. Fink urges companies to better articulate their strategic framework for long-term value creation which explicitly affirms that it has been reviewed by the company's board. Mr. Fink also states "To sustain [financial performance], however, [companies] must also understand the societal impact of your business as well as the ways that broad, structural trends - from slow wage growth to rising automation to climate change - affect your potential for growth.”
With regard to activist investors, the letter urges companies to begin discussions early and carefully evaluate activists’ suggestions. Further, the letter suggests companies in activist situations reach out to other investors like BlackRock in order to get all critical stakeholders in the discussion.
Finally, BlackRock emphasizes the importance of diverse and engaged boards and as well as the social implications of company operations, including what role the company plays in the community and how they are helping workers prepare for retirement.
The tone and emphasis on the corporation's role of society contrasts with a long-held view that the purpose of the corporation is to expand shareholder value and has been characterized as a "revolution" by some, although the focus on value creation continues.
For the past two proxy seasons, the external pressure on mainstream institutions to incorporate social aspects into investment strategies has been growing, reinforced by the UN Principles for Responsible Investment’s threat to remove signatories for not emphasizing social objectives enough among invested companies.
The BlackRock letter could add to the momentum going into the 2018 proxy season and signifies that the intense debate over the purpose of the corporation will only continue to grow.
