Larry Fink, Chairman of BlackRock, the world’s largest asset manager, made headlines yesterday by writing a letter to CEO’s insisting they serve the public interest as well as their own shareholders:
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.
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.
This BlackRock letter, coming after the JANA/CalSTRS letter to Apple, insisting that the company consider the interests of children who overuse their devices, as well as last year’s successful shareholder votes on climate change backed by the largest asset managers, might appear to be a turning point for the capital markets.
The Language of Shareholder Value
But the truth is that in each of these instances, the shareholders calling for corporate responsibility were careful to speak in the language of long-term company shareholder value. The BlackRock letter reflects this tilt by asserting that failure to pursue a social purpose means that “ultimately, that company will provide subpar returns to the investors who depend on it.”
Thus, despite their valiant attempts to lead companies in a more positive direction, these investors are still speaking the language of “shareholder primacy,” a legal and economic doctrine in which shareholders and courts insist that the first priority of corporations is to produce financial return, no matter the cost to the community and the planet. That is, in each case the investors felt compelled to make the case that individual companies would do better for their shareholders by creating positive social impacts, at least in the long run.
Such arguments are good, as far as they go: it is certainly the case that a company can make money in the long term by investing in innovative products that improve lives, and that companies can protect the environment and their bottom lines by limiting waste. But there is no magic convergence between financial success and broader concerns. Sometimes a company will just have to sacrifice some financial return in order to preserve our social, economic and environmental systems. And for universal owners, who have long investment horizons and diversified holdings, such systems are far more important than any single company.
Addressing the Root Cause
The root cause of corporations’ failure of social purpose is thus not a lack of strategic vision on the part of managers. Rather, it is the cramped set of alternatives available, even to ethical managers, in a system dominated by shareholder primacy. We cannot address corporate behavior without addressing corporate governance: in order to fully realize the vision articulated in the BlackRock letter, managers first need a tool to counter shareholder primacy.
Benefit corporation governance is that tool. Benefit corporations reject shareholder primacy and incorporate a new governance model that gives responsible companies and investors the ability to make hard choices when a corporation has the opportunity to earn a return by exploiting the environment, the economy or other critical systems. If large corporations do not begin to adopt this model, legal and market forces will continue pressuring corporate directors to maximize shareholder return, whatever the social or environmental cost. And in the long-run, such “shareholder primacy” will punish long term investors who depend on healthy markets. As Al Gore has stated:
Investing is a means to secure our future well-being. This requires a broader consideration by fiduciaries of systemic effects– for example, consideration of how investments can create better markets tomorrow, rather than simply focusing on “beating” the market today.
Benefit corporations create opportunities for investors and the business community to make a positive impact by allowing them to balance an individual company’s need to provide competitive financial returns with the needs of our economic, social, and environmental systems.
Since the first benefit corporation legislation was enacted in 2010, more than 5,000 benefit corporations have formed in the United States. They have raised more than $1.5 billion from investors in dozens of financings. Last year saw the creation of the world’s largest benefit corporation, DanoneWave, with more than $6 billion in sales, and the first IPO of a benefit corporation, Laureate Education.
The stand being taken by BlackRock and others represents a unique opportunity to reorient our dangerously unbalanced economic system; let’s use the best tool we have to take advantage of that opportunity while there is still time.