Since 2012 BlackRock executive chairman Larry Fink has written an annual letter to the CEOs of companies in which it invests around the world. In 2022, he urges boards to embrace the power of stakeholder capitalism. Here are five themes.
In his latest missive to company leaders, BlackRock chief executive Larry Fink says it has never been more essential for leaders to have a consistent voice, a clear purpose, a coherent strategy and a long-term view. “The stakeholders your company relies upon to deliver profits for shareholders need to hear directly from you — to be engaged and inspired by you,” he writes.
Like Warren Buffett’s stockholder meetings, Fink’s annual letter is a much-anticipated annual event. Written on behalf of investors in BlackRock funds — the company manages US$10 trillion in assets. The letter is addressed to CEOs of the companies in which the fund manager has a stake and outlines Fink’s latest thinking on how companies should be responding to societal, environmental and financial trends.
“Stakeholder capitalism is not about politics,” writes Fink. “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.”
Here are five key points from Fink’s latest letter for company directors to consider:
New sources of capital fuelling market disruption
Never before has there been more capital available for new ideas to become reality, which is fuelling a dynamic landscape of innovation, says Fink. Global financial assets of US$400 trillion mean banks are no longer the gatekeepers to funding and this has spawned an abundance of startups trying to topple market leaders in just about every sector.
BlackRock wants the companies in which it invests to evolve and grow, so they generate attractive returns for decades to come and says it is committed to working with companies from all industries.
Nonetheless, Fink adds the following caveat: “We too must be nimble and ensure our clients’ assets are invested, consistent with their goals, in the most dynamic companies — whether startups or established players — with the best chances at succeeding over time. 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.”
Incumbents can also be disruptors
Decarbonisation of the global economy will create the greatest investment opportunity of our lifetimes as every sector is transformed by new sustainable technology. The next 1000 unicorns won’t be search engines or social media companies, argues Fink. They’ll be sustainable, scalable startups that help the world decarbonise and make the energy transition affordable for consumers.
But it’s not just startups that will disrupt industries. Bold incumbents can also disrupt and many of them have an advantage in capital, market knowledge and technical expertise on the global scale required for the disruption ahead.
“With the unprecedented amount of capital looking for new ideas, incumbents need to be clear about their pathway to succeeding in a net zero economy,” says Fink.
Fink poses three questions for company leaders: What are you doing to disrupt your business? How are you preparing for and participating in the net-zero transition? And finally, as your industry gets transformed by the energy transition, will you go the way of the dodo or will you be a phoenix?
The rationale for sustainability
BlackRock’s fiduciary responsibility as the steward of its clients’ capital requires it to understand how companies are adjusting their businesses for the huge changes the economy is undergoing. Fink wants companies to issue reports consistent with the Task Force on Climate-related Financial Disclosures, which are essential tools for understanding a company’s ability to adapt for the future.
He wants companies to set short-, medium-, and long-term targets for greenhouse gas reductions because the targets and the quality of plans to meet them are critical to the long-term economic interests of shareholders. “We focus on sustainability, not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” writes Fink.
More say on proxy votes
Shareholders are growing increasingly interested in the corporate governance of public companies and BlackRock is responding by giving some of its clients a say in how proxy votes are cast in companies in which it invests. So far, it has offered the service to certain institutional clients who between them are responsible for the pension accounts of 60 million people, but plans to do more.
“We are committed to a future where every investor — even individual investors — can have the option to participate in the proxy voting process if they choose,” writes Fink. “We know there are significant regulatory and logistical hurdles to achieving this today, but we believe this could bring more democracy and more voices to capitalism. Every investor deserves the right to be heard.”
Fink also outlined the fund manager’s approach to engagement. It is significantly expanding its stewardship team so it can understand companies’ progress on environmental, social and governance issues throughout the year, not just during proxy season. “We seek to understand the full range of issues that you face, not just the ones on the ballot — and that includes your long-term strategy,” says Fink.
A new world of work
The pandemic has fundamentally changed the relationship between employers and employees — the quit rate in the US and the UK is at historic highs and wage growth is at its highest level in decades. Employees are looking for more from their employers, including more flexibility and more meaningful work, notes Fink. But unlike other business leaders bemoaning the new dynamic, the investment chief sees it as a challenge and an opportunity.
“Workers demanding more from their employers is an essential feature of effective capitalism,” he writes. “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.”
BlackRock research shows companies which forge strong bonds with their employees see lower levels of turnover and higher returns through the pandemic. Companies ignoring the new dynamic do so at their own peril, because staff 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,” writes Fink.
Read Larry Fink’s 2022 Letter to CEOs.
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