Securities Law Blog

Larry Fink’s 2019 letter to CEOs, “Purpose & Profit,” has received widespread attention.  Its singular focus is corporate social responsibility.  According to Mr. Fink, “society is increasingly looking to companies, both public and private, to address pressing social and economic issues,” such as protecting the environment, helping employees navigate retirement, reversing gender and racial inequality, and preparing workers for the jobs of the future.  For Mr. Fink, this corporate social responsibility is particularly acute today because of political and economic disruption and government’s failure to provide solutions.

In a decades-old debate about the proper role of the corporation in the world, Mr. Fink appears to line up with those who believe a corporation’s purpose, that is, its “fundamental reason for being,” is not solely the “pursuit of profits.”  By identifying and expressing the clear embodiment of a company’s purpose in its business model and corporate strategy, a company can better:

• function with focused strategic discipline that drives long-term profitability;
• unify management, employees and communities;
• drive ethical behavior and create an essential check on actions that go against the best interests of stakeholders;
• guide culture and provide a framework for consistent decision-making;
• help sustain long-term financial returns for the company’s shareholders; and
• at times, allow it to more effectively make strategic pivots in the service of long-run goals.

Mr. Fink’s letter is a call to CEOs to demonstrate corporate leadership by defining a company’s purpose more broadly; to deepen its “commitment to the countries, regions and communities where they operate” on issues central to the world’s future prosperity.

Companies that operate with a sense of purpose and responsibility to stakeholders, according to Mr. Fink, “reap rewards over the long-term,” while “companies that ignore them stumble and fail.”  This phenomenon will only grow, he says, as millennials and even younger generations come to dominate the business workforce, citing recent news of skilled employees staging walkouts and participating in contentious town halls to express their perspective on the importance of corporate purpose.

Looking into the future, as wealth shifts to younger generations and investing preferences change, Mr. Fink’s view is that corporate valuations will be materially impacted by a company’s approach to environmental, social and governance issues.

Accordingly, BlackRock has developed the following investment stewardship priorities for 2019 for investing on behalf of its clients, in order to better understand a company’s corporate purpose and how it aligns with culture and corporate strategy to “underpin financial performance”:

• governance, including a company’s approach to board diversity;
• corporate strategy and capital allocation;
• compensation that promotes long-termism;
• environmental risks and opportunities; and
• human capital management.

Mr. Fink’s 2019 letter to CEOs represents a clear message from a major institutional investor that companies need to consider adopting corporate social responsibility programs, preparing corporate social responsibility and sustainability reports, and disclosing these activities in their SEC public filings (see Section IV.F., Business and Financial Disclosure Required by Regulation S-K (SEC Concept Release, Release No. 33-10064 (April 13, 2016) for guidelines in this regard).  Institutional investors like BlackRock are increasingly using integrated investment processes that combine multiple factors, including sustainability, in determining whether to invest in a company.