United States: Is Stakeholder Capitalism Still Capitalism?

Emphatically yes, says the highly influential CEO of BlackRock, Larry Fink, in his latest annual letter to CEOs. BlackRock, according to the NYT, now manages $10 trillion in assets, so the company would be persuasive even if its CEO never put pen to paper (or fingers to keyboard), but for a number of years, Fink has staked out positions in his annual letters on a variety of social and environmental issues that made companies (and media) pay attention. At the Northwestern Law Securities Regulation Institute in 2021, former SEC Chair Mary Schapiro said that, at companies where she was on the board, Fink's 2020 statement (which announced a number of initiatives designed to put "sustainability at the center of [BlackRock's] investment approach") had had "an enormous impact last year." However, he has also had his denigrators, and this year's letter allocates a lot of terrain to deflecting criticism that his positions are more aligned with "woke" politics than with making money for shareholders. Not so, he contends, stakeholder capitalism is capitalism: BlackRock's conviction "is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders." Ultimately, he asserts, cultivating these beneficial relationships will drive long-term value. How will this year's letter land?

Fink starts out by enunciating his theme: "Stakeholder capitalism," he maintains,

The pandemic, he says, has had a significant impact on most companies, changing almost every company's operating environment and accelerating the impact of technology-how people work and how they buy, creating new businesses and disrupting and destroying others, redefining the relationships between companies and their employees and communities.  Just as profoundly, he maintains, the pandemic has led to further polarization and erosion of public trust in institutions, creating something of a void of trust for business leaders to fill by having "a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company's purpose is its north star in this tumultuous environment. [Stakeholders] don't want to hear us, as CEOs, opine on every issue of the day, but they do need to know where we stand on the societal issues intrinsic to our companies' long-term success."

Fink believes that "[p]utting your company's purpose at the foundation of your relationships with your stakeholders is critical to long-term success. Employees need to understand and connect with your purpose; and when they do, they can be your staunchest advocates. Customers want to see and hear what you stand for as they increasingly look to do business with companies that share their values. And shareholders need to understand the guiding principle driving your vision and mission. 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." But these ideas require further exploration. To that end, Fink doubles down, announcing the launch of a Center for Stakeholder Capitalism to "create a forum for research, dialogue, and debate."

Fink observes that there has been "an explosion in the availability of capital. Today, global financial assets total $400 trillion," which brings with it "risks and opportunities for investors and companies alike." But, he cautions, "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." In Fink's view, the next unicorns will be innovators "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." As industry is transformed, he asks CEOs, "will you go the way of the dodo, or will you be a phoenix?"

One category of stakeholder that Fink highlights are employees. The pandemic has led to the great resignation, even as pay rates have climbed. Now, he contends, "employees across the globe are looking for more from their employer-including more flexibility and more meaningful work." But those worker demands are "an essential feature of effective capitalism," leading to more competition and more innovative environments that will help companies achieve greater profits for their shareholders. BlackRock research shows that companies that "forged strong bonds with their employees have seen lower levels of turnover and higher returns through the pandemic." But companies that do not respond "to their workers do so at their own peril. Turnover drives up expenses, drives down productivity, and erodes culture and corporate memory." Fink wants to hear how companies are "deepen[ing] the bond" with their employees, how companies are ensuring that their boards have "the right oversight of these critical issues" and how company culture is "adapting to this new world." What's more, the pandemic has also underscored issues such as "racial equity, childcare, and mental health-and revealed the gap between generational expectations at work. These themes are now center stage for CEOs, who must be thoughtful about how they use their voice and connect on social issues important to their employees."

Of course, Fink has not abandoned his advocacy of sustainability.  Again, he emphasizes his capitalist bona fides: BlackRock focuses "on sustainability not because we're environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses for the massive changes the economy is undergoing." Most stakeholders, he contends-"from shareholders, to employees, to customers, to communities, and regulators-now expect companies to play a role in decarbonizing the global economy." And in the two years since Fink wrote that "climate risk is investment risk" (see this PubCo post), he has witnessed "a tectonic shift of capital" toward sustainable investments.  While the auto industry may be in the forefront, he expects every industry to be affected by the move to "net zero." Fink believes that "the decarbonizing 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." He sees that "[e]ngineers and scientists are working around the clock on how to decarbonize cement, steel, and plastics; shipping, trucking, and aviation; agriculture, energy, and construction." He also notes the importance of ensuring "continuity of affordable energy supplies during the transition" to sustainable energy; driving up energy prices by limiting supply will hurt "those who can least afford it, resulting in greater polarization around climate change and eroding progress." Although capitalism can "act as a powerful catalyst for change,. businesses can't do this alone.. When we harness the power of both the public and private sectors, we can achieve truly incredible things. This is what we must do to get to net zero."

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It's worth noting that some consider the notion that sustainability increases corporate value to be debatable. In a recent paper from the Rock Center for Corporate Governance at Stanford, Seven Myths of ESG, the authors describe as a myth the concept that "ESG improves outcomes for shareholders and stakeholders (so-called 'doing well by doing good')." Rather, ESG may just be "an incremental cost incurred for the betterment of society." They acknowledge that many believe that ESG helps companies increase long-term value by reducing "long-term risk, thereby leading to future profits that are larger and more sustainable." The idea is that attending to environmental issues helps to lower future remediation costs; investing in employees leads to higher job satisfaction, lower turnover and higher productivity in the long run. But the authors don't seem to buy the claims that ESG increases long-term corporate value, arguing instead that the "evidence is extremely mixed and very dependent on the setting." In support they cite several analyses and meta-analyses purporting to show that corporate social responsibility is not associated with improved performance. For example, they refer to a 2021 "literature review of over 1,100 primary peer-reviewed papers and 27 meta-analyses," which found "that 'the financial performance of ESG investing has on average been indistinguishable from conventional investing.'" (They note that financial performance can also vary significantly depending on the particular element of ESG involved-investing in human capital might lead to higher returns, while, for example, some green investments may not.) Similarly, they cite a 2019 survey of over 200 CEOs and CFOs of companies in the S&P 1500, in which the executives were almost equally divided on the question of whether ESG investment produces net long-term benefits or net long-term costs for the company. The authors' conclusion: "we do not know the financial impact of ESG." (See this PubCo post.)

Finally, Fink mentions BlackRock's initiative to allow clients to vote their own views. Currently, BlackRock allows certain institutional clients to vote if they choose to do so, but it is working to expand that opportunity more broadly.

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In October last year, BlackRock announced that, beginning in 2022, it will begin to "expand the opportunity for clients to participate in proxy voting decisions." BlackRock said that it has been developing this capability in response "to a growing interest in investment stewardship from our clients," enabling clients "to have a greater say in proxy voting, if that is important to [them]."  BlackRock has made the opportunity available initially to institutional clients invested in index strategies-almost $2 trillion of index equity assets in which over 60 million people invest across the globe. It is also looking at expanding "proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products." Clients will have four choices: they can cast votes themselves for all companies; they can vote in accordance with a shareholder proxy service, such as ISS or Glass Lewis; they can cherry pick certain proposals or companies that that they want to vote on themselves-perhaps the most controversial topics of day, such as climate or political spending disclosure-or they can continue to rely on BlackRock Investment Stewardship to vote their shares.

According to the NYT's Dealbook, "[a]llowing investors to vote their shares gives BlackRock some cover, especially when it comes to what has become its thorniest issue: its size. In recent years, BlackRock has been simultaneously criticized for having too much power and for not using it to push for more changes at companies in which it invests."  For example, Harvard Professor and former SEC general counsel John Coates predicted in 2018 that index investing could lead to the control of investment entities by a few people-the "twelve," he called them-with enormous concentrated power over most public companies. And not just over business, but also perhaps over the entire economy and even the "social contract."  (See this PubCo post.) But it's not just BlackRock's phenomenal power standing alone that has drawn criticism; it's what BlackRock has done-or rather failed to do-with that power. While BlackRock and Fink have long played an outsized role in promoting corporate sustainability and social responsibility, that was often as far as its advocacy went.  As a result, BlackRock has long been a target for protests by activists. Starting with the 2020-21 proxy season, however, there was a dramatic change in BlackRock's approach to voting, as a new global head of investment stewardship began to implement changes.   For example, in the 2020-21 proxy year, BlackRock Investment Stewardship supported 35% of shareholder proposals (297 out of 843), compared to 17% (155 out of 889) the previous year. And, in the same period, BIS voted against the election of 255 directors as a result of climate-related concerns, an increase from only 55 in the prior year. As a result, views have been mixed as to whether this move will ultimately be a good thing.  (See this PubCo post.)

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