Fink's Letter to CEOs Upends a Half-Century of Business Thought

(Bloomberg) -- A memorable phrase by Nobel economist Milton Friedman has for almost 50 years encapsulated the mission of private enterprise in America: “The social responsibility of business is to increase its profits.”

A letter sent to corporate executives this week by BlackRock Chief Executive Officer Laurence D. Fink may have the effect, intentional or not, of kneecapping Friedman’s dictum. Fink, 65, offers “a new model of shareholder engagement,” in which investors and managers, through continuous dialog, help companies align their interests with society’s rapidly changing needs.

Fink’s letter may turn out to be as useful a symbol of 2018 as Friedman’s essay was in 1970. Profits and performance are still paramount. There’s just a new stipulation, Fink told the CEOs.

“To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends -- from slow wage growth to rising automation to climate change -- affect your potential for growth,” he wrote.

Something funny happened in the last few years when the most important news stories about corporate sustainability and responsibility became the most important stories period.

The growing list of prominent men in business deposed after sexual harassment allegations came to light underscores the movement toward diverse, respectful workplaces. Energy --historically the most plodding and regulated of major industries -- has become a locus of high-tech excitement, as renewable power becomes economical and electric cars begin a serious run at the internal combustion engine. 

Ford Motor Co. announced an $11 billion investment in electric vehicles over the weekend. Investment in renewable energy totaled $333.5 billion last year, the second-highest on record, according to Bloomberg New Energy Finance. By mid-2017, socially responsible investments reached $23 trillion, a 25 percent increase in two years, according to the Global Sustainable Investment Alliance.

Friedman’s famous rule-of-thumb was the headline of an essay in the New York Times Magazine in September 1970, and has rarely been far from public consciousness since.

Whatever specifics Friedman’s manifesto lacked about the events that propelled him to write it were made up for three weeks later, when the magazine published evidence of how readers understood it. The essay was received by many as an attack on the environmental movement and President Richard Nixon’s new regulatory powers over pollution and public health.

‘Positive Contribution’

Today, it’s the White House itself leading a charge against regulation, with environmental rules given particular attention. In 2018, it’s the private sector arguing for what Fink calls “making a positive contribution to society.”

Fink’s model eschews the short-term focus that he said drives companies’ emphasis on quarterly results and the limitations that annual meetings place on dialog between executives and shareholders. Instead, investors and management should maintain continuous communication “about improving long-term value,” Fink wrote.

BlackRock is literally doubling down internally on its corporate governance push, increasing the size of its team by 100 percent.

Fink's Letter to CEOs Upends a Half-Century of Business Thought

Two things give Fink’s memorandum heft. The first is his position as head of the world’s largest money manager. The second is the ubiquity of “sustainability,” however defined, across the private sector.

Corporate sustainability was first popularized among large companies by Wal-Mart Stores Inc. and General Electric Co. around 2005. The motivations are many, and include everything from the idea that companies with a social purpose better attract and retain employees, to the financial benefits of diversity, to increasingly visible disruptions from climate change.

If there are companies left in the S&P 500 without corporate responsibility or sustainability programs, they don’t call attention to it. The Trump administration may be an outlier on climate and sustainability issues compared with much of the private sector.

“We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining,” Fink wrote. “As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.”

BlackRock’s push is also a consequence of the rise of passive investing in index funds. Passive funds take many decisions out of investors’ hands -- you’re either in the index or not, rather than picking stocks actively. By building relationships with companies, Fink suggests investors can have a greater role in steering managers toward corporate and societal goals.

©2018 Bloomberg L.P.