Key takeouts

Companies need to adjust in line with higher stakeholder expectations: 'Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards. And it will continue to accelerate as millennials – who today represent 35 percent of the workforce – express new expectations of the companies they work for, buy from, and invest in'.

In a climate of uncertainty (and especially in the absence of government action), CEOs need to take a leadership role on social and political issues: 'Stakeholders are pushing companies to wade into sensitive social and political issues – especially as they see governments failing to do so effectively. As CEOs, we don’t always get it right. And what is appropriate for one company may not be for another.  One thing, however, is certain: the world needs your leadership'.  

Retirement is one issue where companies and CEOs can take a leadership role: 'Companies must embrace a greater responsibility to help workers navigate retirement, lending their expertise and capacity for innovation to solve this immense global challenge'.

BlackRock Inc has released its chairman and CEO Larry Fink’s 2019 annual letter to CEOs in which he calls on them not only to ensure their organisations have a 'purpose' and deliver more than financial returns to stakeholders as he has done previously, but to take a leadership role on social and political issues. A high level overview of some of the key points raised by Mr Fink is below.

Social purpose as a driver of profit, and of ethical behaviour

  • 'An inextricable link' between purpose and profit: Mr Fink emphasised the link between profit and purpose, and the necessity of 'purpose' as a driver of value. 'Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them' he said.
  • 'Purpose' as a driver of ethical behaviour: Mr Fink also said that 'purpose' could be effective in promoting an ethical culture/ethical conduct. Purpose, 'drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company' he writes.
  • 'No intention of telling companies what their purpose should be': Mr Fink writes that BlackRock has been engaging over the past year on how their purpose aligns with culture and corporate strategy, but that it has 'no intention of telling companies what their purpose should be – that is the role of your management team and your board of directors'. Rather, Mr Fink said that BlackRock's aim is to understand how 'a company’s purpose informs its strategy and culture to underpin sustainable financial performance'.

Millennials have different expectations of companies

  • Millennials who represent 35% of the workforce, have new and 'more exacting' expectations of the companies they 'work for, buy from and invest in', Mr Fink writes. Going forward, he writes, given a tightening labour market, employees rather than just shareholders, are likely to have a greater say in defining a company's purpose and priorities. The beginnings of this shift can already been seen, Mr Fink suggests, in recent walkouts of 'skilled employees' over the past year. Given this, companies that wish to attract and retain talent will need to adapt to these new expectations he argues.

Stakeholder expectation that CEOs take a leadership role on social/political issues (especially where governments have failed)

  • Mr Fink writes that 'a time of great political and economic disruption, your [CEO's] leadership is indispensable' adding that stakeholders are increasingly pushing companies to 'wade into sensitive social and political issues — especially as they see governments failing to do so effectively'. Mr Fink goes on to say that though companies cannot solve every issue, 'there are many – from retirement to infrastructure to preparing workers for the jobs of the future – that cannot be solved without corporate leadership'.

Leadership role in relation to retirement

  • Mr Fink identified 'retirement' as an area in which CEOs/companies could demonstrate leadership. 'Companies must embrace a greater responsibility to help workers navigate retirement, lending their expertise and capacity for innovation to solve this immense global challenge. In doing so, companies will create not just a more stable and engaged workforce, but also a more economically secure population in the places where they operate' he writes

BlackRock's engagement priorities in 2019

  • Mr Fink identified BlackRock’s Investment Stewardship engagement priorities for 2019 as follows: governance (including in relation to board diversity); corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management. He said that these priorities reflect BlackRock's 'commitment to engaging around issues that influence a company’s prospects not over the next quarter, but over the long horizons that our clients are planning for'.
  • Expectation of ongoing engagement: Mr Fink writes that in order for 'engagements to be productive, they cannot occur only during proxy season when the discussion is about an up-or-down vote on proxy proposals. The best outcomes come from a robust, year-round dialogue'.

[Note: The 2019 Edelman Trust Barometer appears to reflect a number of themes highlighted by Mr Fink including increased expectations of CEOs, and more particularly, the expectation that CEOs should step in to take a leadership role on a range of issues in the absence of government action. The findings of the Edelman Trust Barometer are discussed in a separate post. See: Governance News 23/01/2019.]

[Sources: BlackRock: Larry Finks Annual Letter to CEOs 2019 18/01/2019; The New York Times 17/01/2019; Forbes 17/01/2019; New York Post 17/01/2019; [registration required] The AFR 18/01/2019; [registration required] The FT 18/01/2019; Financial Standard 18/01/2019]