- Larry Fink, founder of $US6.3 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 $US6.3 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 licence 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?
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.”
“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.
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.