Every year since 2012, Larry Fink writes a letter that starts “Dear CEO.” As the Chairman and CEO of BlackRock, he represents one of the largest shareholders in nearly every publicly traded company in the world – which makes Larry Fink a big deal and his letters a coveted read among Wall Street watchers. This year, Mr. Fink’s letter is causing more of a buzz than usual. Beyond the usual observations promoting long-term value creation, he also made one really bold claim: “The time has come for a new model of shareholder engagement.” If BlackRock and its peers are sincere about ushering in this new model, this letter will be looked back on as the clarion call for a needed reorientation of business as usual.
Fink begins his letter to CEOs by making it clear that he’s not just talking about operating with a clear conscience, he’s talking about good business.
The public expectations of your company have never been greater. 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. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.
And I give credit to Larry Fink for not simply focusing on the acts of corporate citizenship – which can turn into marketing spin – but also drawing attention to the well from which all this good work springs. To make sure readers did not miss the point, he titled his letter “A Sense of Purpose.”
Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth.
Fink has long taken the mantle of Dutch Uncle, nudging his CEO peers to make more prudent use of investor capital. But in this letter, Larry Fink turns this mirror on himself and his peers.
Just as the responsibilities your company faces have grown, so too have the responsibilities of asset managers. We must be active, engaged agents on behalf of the clients invested with BlackRock, who are the true owners of your company. This responsibility goes beyond casting proxy votes at annual meetings – it means investing the time and resources necessary to foster long-term value.
Some of my shareholder advocacy coalition peers will argue that it’s too early to celebrate. It was only back in April 2016 when the talented Gretchen Morgenson penned her NY Times whip-lashing article BlackRock Wields its Big Stick Like a Wet Noodle on CEO Pay. But I believe this moment and this letter really are different. I believe this is different not only because of the clarity Fink has found as he writes on these issues but also because he commits to doubling his staff focused on shareholder advocacy over the next three years.
This letter comes at a time when passive investing strategies continue to dominate new money flows to the benefit of low-cost leaders Vanguard, BlackRock and State Street. Fink’s new model argues that passive investing is not a ticket to lazy shareholder advocacy efforts. In fact, I expect the time will come when asset managers who act as passive shareholders are viewed as breaching their fiduciary duty to care for the best interests of their clients.