If you felt the ground shift on Wall Street on Tuesday, it wasn’t an earthquake. The tremor came from a letter that BlackRock founder Laurence Fink sent to business leaders around the world. Of course, any message from BlackRock, which manages $6 trillion in investments, will get the attention of the C-suite. But Tuesday’s letter was remarkable for its intimation that corporations that fail to concern themselves with social responsibility are in danger of losing BlackRock’s backing.
In its most direct passage, the letter states: “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.”
The New York Times justifiably called the release of the letter a potential “watershed” moment that “raises all sorts of questions about the very nature of capitalism.” There is, indeed, much to unpack from the letter—including a question over how seriously investors should take BlackRock’s emphasis on social responsibility. If the answer is “very,” we will be analyzing Tuesday’s statement for years to come. For now, we’ll satisfy ourselves with four observations.
- A reversal on activism: As the Times notes, the letter softens Mr. Fink’s stance on investor activism. As recently as 2014, he told Dealbook: “If you ask me if activism hurts job creation, the answer is yes.” While recognizing that activists can pursue unhelpfully short-sighted aims, Fink simultaneously commits BlackRock to a more activist stance. He tells CEOs: “We must be active, engaged agents on behalf of the clients invested with BlackRock, who are the true owners of your company.”
- Continued momentum on ESG (environmental, social, and governance) : If BlackRock has changed its stance on activism—and in particular, its support for ESG reforms—it is hardly alone. In that sense, the letter is just the latest sign of a trend that has been building. Shareholder resolutions on ESG matters increased dramatically in 2017, according to ProxyPreview, and institutional investors are getting into the act. Britain’s Legal & General Investment Management, for instance, initiated a campaign against all-male boards at U.K. companies two years ago, and it is credited with achieving the appointment of female board members at Jimmy Choo and other companies. BlackRock itself recently joined with Vanguard in successfully pushing a reluctant Exxon to make climate-change disclosures.
- Tension with SEC action: BlackRock’s letter is all the more notable because of its tension with the SEC policy direction. In November, the SEC published guidance making it easier for companies to avoid company-wide votes on shareholder proposals dealing with “social or ethical matters”—exactly the kind that may be most likely to fulfill BlackRock’s call for positive contributions to society.
- Institutional investors filling a vacuum? There is one possible reading of the letter that harmonizes all of the above. It is this: BlackRock and other large investors are getting active about policing corporate behavior—and demanding that it benefit the public—as a way to fill the vacuum currently being left by government. Arguably, the letter states this outright when it says: “We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater.”
It remains to be seen whether Tuesday’s message marked a sea change in shareholder relations. But the force of BlackRock’s words can’t be ignored, nor can its commitment to doubling the size of its team that engages with companies. Executives way up in the C-suite, at least, must be asking each other: “Did you feel that?”