Larry Fink's annual letter 2022: Stakeholder capitalism is not woke, just good business says BlackRock CEO

6 minute read  24.01.2022 Kate Hilder, Siobhan Doherty

In his latest annual 'dear CEO' letter, BlackRock CEO Larry Fink has defended stakeholder capitalism and BlackRock's push to hold firms accountable for progress on a range of ESG issues as good business practice and not inconsistent with, or at the cost of, long term financial returns.  Rather, the letter seeks to explain why effective stakeholder capitalism is a driver of value-creation over the long term.

In his 2022 letter to CEOs, BlackRock CEO Larry Fink highlights the themes he considers 'vital to driving durable long-term returns'. 

A headline message is the role of effective stakeholder capitalism (underpinned effective stakeholder engagement, clear corporate purpose and innovation) in driving positive financial as well as social outcomes over the longer term.  

In terms of specific areas of investor concern, Mr Fink highlights planning for the transition to a low-carbon economy and human capital management as important issues about which companies should be prepared to engage.  The letter also makes clear that investors are looking for detailed disclosure around how companies are managing these issues.   

A high level overview of the key points in he letter is below.

Stakeholder Capitalism is good business

As flagged, a key theme running through the letter is the idea that companies that are driven not only by profits but by purpose – companies that deliver not only for shareholders but for key stakeholders as well – are more successful over the longer term.  As such, Mr Fink argues that stakeholder capitalism is essentially good business.  He writes:

'Stakeholder capitalism is not about politics. It is not a social or ideological agenda.  It is not “woke".  It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.  This is the power of capitalism….It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term.  Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success'.

The COVID-19 pandemic has underlined the importance of corporate purpose 

Mr Fink writes that the uncertainty caused by the pandemic, together with the erosion of trust in traditional institutions, has served to underscore the importance of corporate purpose.  Mr Fink writes,

'Putting your company’s purpose at the foundation of your relationships with your stakeholders is critical to long-term success…They will be more likely to support you in difficult moments if they have a clear understanding of your strategy and what is behind it'.

Mr Fink also considers purpose to be central to enabling companies to innovate and to adapt to the changing environment.  

'If you stay true to your company's purpose and focus on the long term, while adapting to this new world around us, you will deliver durable returns for shareholders and help realize the power of capitalism for all'.

Effective engagement with key stakeholders is key

Effective stakeholder engagement is also positioned in the letter, together with purpose, as key aspect of effective stakeholder capitalism.   Mr Fink writes, 

'Time and again, what they [businesses that are successful over the long-term] all share is that they have a clear sense of purpose; consistent values; and, crucially, they recognise the importance of engaging with and delivering for their key stakeholders.  This is the foundation of stakeholder capitalism…
In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders'.

Two key areas of investor concern

The letter highlights two areas of suggested focus for companies: human capital management and the energy transition.  

1.  Human Capital Management 

A new employee-employer relationship 

Mr Fink writes that 'no relationship has been changed more by the pandemic than the one between employers and employees' as workers the world over seek more flexibility and more meaningful work (as well as higher pay in some markets).  In addition, he considers that the pandemic has 'shone a light' on a host of other issues such as racial equity, childcare, and mental health.   

From BlackRock's perspective, this is not a negative development, in fact Mr Fink considers that 'workers demanding more from their employers is an essential feature of effective capitalism' as it 'drives prosperity and creates a more competitive landscape for talent, pushing companies to create better, more innovative environments for their employees – actions that will help them achieve greater profits for their shareholders'. 

However, Mr Fink cautions that companies that are not 'grounded in their purpose', and that fail to adapt to changed employee expectations/the new environment expose themselves to risk.  

'Companies not adjusting to this new reality and responding to their workers do so at their own peril. Turnover drives up expenses, drives down productivity, and erodes culture and corporate memory. CEOs need to be asking themselves whether they are creating an environment that helps them compete for talent.'

For this reason, the letter suggests that companies should expect to engage on these issues including being able explain the steps they are taking to attract and retain employees.  Mr Fink writes:

'At BlackRock, we want to understand how this trend is impacting your industry and your company. What are you doing to deepen the bond with your employees? How are you ensuring that employees of all backgrounds feel safe enough to maximize their creativity, innovation, and productivity? How are you ensuring your board has the right oversight of these critical issues? Where and how we work will never be the same as it was. How is your company’s culture adapting to this new world?'

2.  The transition to a low-carbon future 

Investors expect companies to explain how they plan to navigate the transition 

Mr Fink writes that in the two years since he flagged climate risk as investment risk, the predicted 'tectonic' shift of capital towards sustainable investments as the world transitions to a low-carbon future has started, and is now accelerating.  From an investor standpoint he writes, how companies plan to navigate the transition, and more particularly whether/how established businesses will be able to adapt is a key issue.  

In particular, the letter states that investors want to know:

'what are you doing to disrupt your business? How are you preparing for and participating in the net zero transition? As your industry gets transformed by the energy transition, will you go the way of the dodo, or will you be a phoenix?'

In terms of disclosure, he writes that investors are focused on sustainability, 'not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients'.  This means understanding the plans companies have in place to transition to a sustainable future, including the targets they are setting for emissions reduction and the quality of their plans to meet these goals.  

The transition doesn't mean an instant switch from brown to green and it won't be instant 

Commenting briefly on the path to net zero, Mr Fink writes that the transition 'is already uneven with different parts of the global economy moving at different speeds'.   Moreover, the letter emphasises that the energy transition cannot happen 'overnight' and will mean passing through 'shades of brown to shades of green' as alternative energy sources are developed and become more affordable. 

Mr Fink considers for example that ensuring continuity of affordable energy supplies during the transitional phase will mean the continued use of fossil fuels such as natural gas in some regions for heating as well as for the production of hydrogen.  This, he considers makes pragmatic sense, but is also important in terms of ensuring a just transition.  He writes:

'As we pursue these ambitious goals - which will take time - governments and companies must ensure that people continue to have access to reliable and affordable energy sources.  This is the only way we will create a green economy that is fair and just and avoid societal discord.  And any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices for those who can least afford it, resulting in greater polarisation around climate change and eroding progress'.

Why BlackRock is not divesting from oil and gas 

Mr Fink explains that BlackRock does not 'pursue divestment from oil and gas companies as a policy' because the firm's view is that divestment of carbon intensive assets 'will not get the world to net zero'.

Rather, BlackRock supports the transformation of carbon intensive businesses as a critical part of global decarbonisation.   

'We believe the companies leading the transition present a vital investment opportunity for our clients and driving capital towards these phoenixes will be essential to achieving a net zero world'.

Having said this, Mr Fink argues that government has an important role to play in this context.

'Capitalism has the power to shape society and act as a powerful catalyst for change.  But businesses can’t do this alone, and they cannot be the climate police.  That will not be a good outcome for society.  We need governments to provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets. They must also support communities affected by the transition, help catalyse capital for the emerging markets, and invest in the innovation and technology that will be essential to decarbonising the global economy'.

There is a considerable upside to the transition (and considerable risk for companies that fail to adapt)

The letter makes clear that the energy transition affords significant opportunities for 'green' startups as well as for established companies that are willing/able to  adapt to a low carbon economy.  Conversely, Mr Fink considers that companies that fail to adapt face considerable risk.  As such, the letter positions innovation in this space as an imperative rather than a choice for existing businesses.  Mr Fink writes:

'I believe the decarbonising of the global economy is going to create the greatest investment opportunity of our lifetime.  It will also leave behind the companies that don’t adapt, regardless of what industry they are in…The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers…
With the unprecedented amount of capital looking for new ideas, incumbents need to be clear about their pathway succeeding in a net zero economy.  And it’s not just startups that can and will disrupt industries.  Bold incumbents can and must do it too.  Indeed, many incumbents have an advantage in capital, market knowledge, and technical expertise on the global scale required for the disruption ahead'.

However, the letter underscores that  access to capital 'is not a right. It is a privilege. And the duty to attract that capital in a responsible and sustainable way lies with you'.  

Giving shareholders more opportunity to participate 

Mr Fink writes that BlackRock has observed a growing interest among shareholders in the corporate governance of public companies and in having a stronger voice in company decision making.  In light of this growing interest in active involvement, he writes that BlackRock is pursuing an initiative to enable more of its clients to have the option to have a say in how proxy votes are cast at companies their money is invested in. 

At this point, this is limited to certain institutional clients, but in future BlackRock is 'committed to a future' where all investors, including individual investors, will have the option to participate in the proxy process. 

Research into the link between stakeholder engagement and firm value

The letter flags that BlackRock has launched a new research centre - the Center for Stakeholder Capitalism - with a view to better understanding the relationship between companies and their stakeholders and the connection between stakeholder engagement and shareholder value. 

Mr Fink states that this new centre is expected to provide a forum for research, dialogue, and debate and bring together leading CEOs, investors, policy experts, and academics to share their experience and deliver their insights.

[Source: BlackRock CEO Letter 2022]

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