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Larry Fink, founder of $6.3 trillion asset manager
BlackRock, sent a letter to CEOs everywhere on January
16.
A week later, it's a big topic of discussion at the
World Economic Forum in Davos, where the global elite have
gathered for a week of meetings, panel discussions, dinners and
parties.
While the response has been broadly positive, there are
certain aspects of Fink's letter that some executives have
taken issue with. One person went so far as to say some are
"pissed off" with it.
BlackRock has committed to ramping up its
investor-stewardship initiative, with the team doubling in size
over the next three years. That means "Larry's letter" is going
to live on as a topic of conversations in boardrooms around the
world for months to come.
DAVOS — Everyone is talking about "Larry's letter."
The Larry they're referring to is Larry Fink, founder
of $6.3 trillion asset manager BlackRock, who
last week sent a letter to the CEO's of public companies
stressing the need for a clear long-term strategy, and an
understanding of the societal impact of their business.
"Without a sense of purpose, no company, either public or
private, can achieve its full potential," Fink said in the
letter. The BlackRock founder then detailed what could happen to
companies lacking a sense of purpose:
"It will ultimately lose the license to operate from key
stakeholders. It will succumb to short-term pressures to
distribute earnings, and, in the process, sacrifice investments
in employee development, innovation, and capital expenditures
that are necessary for long-term growth. It will remain exposed
to activist campaigns that articulate a clearer goal, even if
that goal serves only the shortest and narrowest of objectives."
The letter seems to have reverberated around boardrooms around
the world. At the World Economic Forum in the Swiss Alps, it has
become a talking point for many of the corporate executives
attending. And while the response has been broadly positive,
there are certain aspects of Fink's letter that some executives
have taken issue with. One person went so far as to say some are
"pissed off" with it.
In all of these conversations, one question keeps coming up. What
counts as a sense of purpose?
Long-term strategy
Fink's letter can be split in two, with one portion focused on
the need for a long-term strategy. And it's here that most of the
people we've spoken to in Davos are in agreement. In his letter,
Fink said that "companies must be able to describe their strategy
for long-term growth."
He adds:
"The statement of long-term strategy is essential to
understanding a company's actions and policies, its preparation
for potential challenges, and the context of its shorter-term
decisions. Your company's strategy must articulate a path to
achieve financial performance."
The idea here is pretty straightforward, but ask around and
you'll hear that the number of companies that lack this statement
of a long-term vision is surprisingly high. And as one top
executive told Business Insider, with no concept of the
destination, every direction is the right (and wrong) way to get
there. If CEOs are clear on where they're intending to take the
business, in contrast, it's much easier to chart the progress,
and if necessary, correct course.
Social purpose
But where Fink's message seems to have struck a nerve, is
where it shifts to the idea that CEO's "must also understand the
societal impact of your business." He said in the letter
(emphasis BlackRock's):
"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."
There are typically three responses to this.
- First, there are those that agree wholeheartedly. This is the
"Larry's right" group. They see Fink's letter as making a bold
statement on the need for a better version of capitalism.
- Then there are those who question whether there's a friction
between a "positive contribution to society" and financial
performance. You could call this the "Yes, but ..." group. The
argument here is that these social impact investments often take
a long time to pay off, and in the meantime, the CEO could lose
his or her job.
- The last group questions whether it's BlackRock's place to
tell CEOs they need to make a "positive contribution to society,"
and whether doing so is straying into the world of politics. This
is the "Pissed off" group.
BlackRock has committed to ramping up its
investor-stewardship initiative, with the team doubling in size
over the next three years under the new leadership of Barbara
Novick, a vice chairman who helped found BlackRock.
That means "Larry's letter" is going to live on as a topic
of conversations in boardrooms around the world for months to
come, whether CEOs like it or not.
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