Larry Fink’s 2022 Letter to CEOs … on how capitalism is changing – from profit to purpose, shareholders to stakeholders
February 15, 2022
Larry Fink shocked the financial world in 2018, when he declared that his BlackRock investment firm would only invest in companies that could demonstrate that they had a meaningful purpose beyond profits.
Over the previous 30 years Fink had built BlackRock into the largest investment firm in the world, with almost $9 trillion in assets under management. However, he was always a leader who looked beyond the numbers. His letter to the CEOs of nearly every large company in America deplored the corporate culture of short-term thinking and threatened to vote out board members who did not hold management more holistically accountable. Other large investment firms have followed BlackRock’s lead.
“If the system is really going to change, pressure needs to come from the investment community,” says the Drucker Institute. “And no voice has been more important or more forceful in this regard than Larry Fink’s.”
2018 Letter to CEOs: in his most disruptive letter, that marked his shift to purposeful thinking, he wrote that a long-term perspective matters more than short-term returns:
- Expectation that companies deliver more than short term financial returns: In the current social and political context, society is increasingly looking to the private sector to provide more than short term financial returns.
- Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.
- ‘Social licence to operate’ and long term prosperity depends on making a ‘positive contribution to society’, and the absence of a long-term focus or ‘sense of purpose’ exposes companies to greater risks.
- A new model of shareholder engagement is required with clearer and fuller disclosure of strategies to deliver long-term growth reviewed at board level.
2019 Letter to CEOs: he became more specific about the relative importance of purpose and profit, saying that profit was an outcome, but purpose was the goal:
- Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders.
- Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked.
- Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders.
- Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail.
2020 Letter to CEOs: he called for a fundamental reshaping of finance, driven by the urgent need for governments and businesses to respond to the challenges of climate change:
- A company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. Ultimately, purpose is the engine of long-term profitability.
- BlackRock believes that the Sustainability Accounting Standards Board (SASB) provides a clear set of standards for reporting sustainability information across a wide range of issues.
- Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital.
- We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.
2021 Letter to CEOs: he wrote that achieving “net zero” carbon emissions is the best way to drive investment growth, and economic recovery.
- The pandemic demonstrated the importance of ESG: reflecting on 2020, he argues that these issues – with climate change as the existential threat that affects us all – matter more than ever, revealing a 96% increase in sustainable investing in 2019
- Now, because of Covid-19, we know how fragile we are, we must act to remain under 2 degrees. He challenges all companies to achieve “net zero” by 2050. Companies who ignore this, he says, will rapidly lose investor confidence, and economic value.
- We need a single global reporting standard. He says most companies, even the best, do a poor job in accounting for carbon emissions, and demands the same standards of accounting as applied to financials. What gets measured, gets done he says.
- Social issues are rising fast, he argues. Racial and gender equality came into focus during 2020, although economic inequality is still less visible. Business, he says, holds the key to inclusive capitalism – DEI – diversity, equity, inclusion.
2022 Letter to CEOs: he addressed the power of capitalism, but also the changing nature of capitalism – from profit to purpose, shareholders to stakeholders, and more:
- Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.
- In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term.
- At the foundation of capitalism is the process of constant reinvention – how companies must continually evolve as the world around them changes or risk being replaced by new competitors.
- It’s never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its north star in this tumultuous environment.
Institutional Investor has called Fink “the Steve Jobs of the money game” for his ability to foresee a changing world, where most peers are limited in their mindsets by conventional assumptions and incremental solutions. Fink says he is ready to shake-up BlackRock and the entire industry “We need to be willing to reimagine every aspect of our company and how we manage it,” he wrote “and so should every other business”.
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