'To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…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' Mr Fink wrote.
BlackRock Inc has released its chairman and CEO Larry Fink’s annual letter to CEOs in which he calls on the CEOs of companies in which BlackRock invests to better articulate long term strategic plans and to explain how their organisations contribute to society. Mr Fink adds that BlackRock will step up engagement with companies, on these issues. Some of his key points include the following.
- Expectation that companies deliver more than short term financial returns: Mr Fink said in the current social and political context, society is increasingly looking to the private sector to provide more than short term financial returns. For millions, the prospect of a secure retirement is slipping further and further away…We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges'. He went on to say that, given this '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'.
- 'Social licence to operate' and long term prosperity depends on making a 'positive contribution to society': Mr Fink asked that CEOs and boards focus, not only on delivery of strong financial performance, but on demonstrating to shareholders how their own company makes a 'positive contribution' to society. 'To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…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' Mr Fink wrote.
- The absence of a long-term focus or 'sense of purpose' companies exposed themselves to greater risks: Companies without a long-term focus Mr Find stated '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. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education' he said.
- 'A new model of shareholder engagement': Mr Fink stated that 'The time has come for a new model of shareholder engagement – one that strengthens and deepens communication between shareholders and the companies that they own. I have written before that companies have been too focused on quarterly results; similarly, shareholder engagement has been too focused on annual meetings and proxy votes. If engagement is to be meaningful and productive – if we collectively are going to focus on benefitting shareholders instead of wasting time and money in proxy fights – then engagement needs to be a year-round conversation about improving long-term value. BlackRock recognizes and embraces our responsibility to help drive this change'.
- Change in direction from focus on proxy voting towards direct engagement with companies: Mr Fink said that BlackRock had transformed its approach from being focused on proxy voting towards an approach based on engagement with companies and flagged that this would continue to be an area of focus. In addition, he said that the company intended to 'double the size of the investment stewardship team over the next three years' to 'foster even more effective engagement' and build a framework for 'deeper, more frequent and more productive conversations'.
- Clearer and fuller disclosure of strategies to deliver long-term growth reviewed at board level: Mr Fink called on companies to focus on providing clear explanations of their long term strategies. 'I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company. When we meet with directors, we also expect them to describe the Board process for overseeing your strategy'. Mr Fink went on to add that an understanding of the company's strategy was essential to understanding its actions, policies and decision making and encouraged companies to provide sufficient detail to enable investors to understand it clearly. He commented that 'Of course, we recognize that the market is far more comfortable with 10Qs and colored proxy cards than complex strategy discussions. But a central reason for the rise of activism – and wasteful proxy fights – is that companies have not been explicit enough about their long-term strategies…it is your responsibility to explain to shareholders how major legislative or regulatory changes will impact not just next year’s balance sheet, but also your long-term strategy for growth'.
- Engage early with activists: Mr Fink wrote: 'Where activists do offer valuable ideas – which is more often than some detractors suggest – we encourage companies to begin discussions early, to engage with shareholders like BlackRock, and to bring other critical stakeholders to the table. But when a company waits until a proxy proposal to engage or fails to express its long-term strategy in a compelling manner, we believe the opportunity for meaningful dialogue has often already been missed'.
- Board engagement and responsiveness: Mr Fink wrote: 'Just as we seek deeper conversation between companies and shareholders, we also ask that directors assume deeper involvement with a firm’s long-term strategy. Boards meet only periodically, but their responsibility is continuous. Directors whose knowledge is derived only from sporadic meetings are not fulfilling their duty to shareholders. Likewise, executives who view boards as a nuisance only undermine themselves and the company’s prospects for long-term growth'.
- Board Diversity will be a key focus: Mr Fink stated that board diversity would remain a focus for BlackRock, 'We also will continue to emphasize the importance of a diverse board. Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth' he wrote.
- Leadership on issues of importance: Mr Fink also called on companies to demonstrate leadership on a broad range of issues. He wrote: 'In the current environment…stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process. Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that that will help them achieve their goals?'
[Source: BlackRock: Larry Fink's 2018 Letter to CEOs; The Times 15/01/2018; [registration required] The AFR 17/01/2018]
Broader move away from short-termism? A Harvard Business Review article has identified the recent actions by Facebook CEO Mark Zuckerberg in responding to public calls to make changes at his company, and BlackRock CEO Larry Fink's recent letter, as indicative of a broader trend away from short-termism in favour of a longer term focus that recognises that social commitments 'can pay off in the longer term'. [Source: The Harvard Business Review 16/01/2017]