In 2018, Larry Fink, the Chairman and CEO of BlackRock, Inc., issued a letter to CEOs in which he explicitly called for corporations to embrace ESG—economic, social and governance—thinking in their long-term strategies. Commenting on the increased income inequality between those who benefited from the 2017 boom in equity prices and those with low wages and little retirement savings, he wrote:
“I believe these trends are a major source of the anxiety and polarization that we see across the world today.”
“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.”
Fink explicitly challenged CEOs to meet these challenges by adopting a new model of corporate governance. “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.”
Rethinking the classics
This argument in favor of what used to be called “corporate social responsibility” (CSR) stands in stark contrast to the classical view of the corporation’s purpose, as expounded by Milton Friedman in his 1970 essay “The Social Responsibility of Business is to Increase Its Profits,” in which he argued that, first, corporations are artificial beings and therefore have no responsibilities themselves; and second, the executives of these corporations are agents of the owners, i.e., the shareholders, and as such they have a primary responsibility “to conduct the business in accordance with their desires, which generally will be to make as much money as possible”while conforming to the basic legal and ethical rules of society.
In contrast to profit-making, Friedman stated that actions falling under the rubric of CSR—combating pollution, investing in underserved communities, etc.— were properly the domain of government, not businesses. Executives who undertake CSR activities as a positive public relations exercise “clearly harm the foundation of a free society” by implying that profit-making for its own sake is somehow improper and needs to be offset by good deeds, while those who undertake CSR in earnest are promoting “pure and unadulterated socialism” by appropriating private resources—using shareholder value, without the shareholders’ permission—to achieve public goods.
Unfortunately for the classical capitalist project, socialism is less of a dirty word today than it was in 1970. According to Gallup, only 45 percent of Americans aged 18-29 have a positive view of capitalism while 51 percent have a positive view of socialism (even if they do not have a specific definition of the two terms). Newspapers report how young Americans object to capitalism’s impact on the environment, income inequality, and other social issues. Many politicians (at least on the left) are echoing this theme in the U.S. and abroad.
Fink’s thesis, then, is that CEOs have to respond to this sentiment. In language that might make Friedman cringe, he continued in this 2018 letter:
“In the current environment, these stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”
“Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?”
“Purpose & Profit”
In his 2019 letter, Fink refined the debate by speaking directly to purpose: “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.” (Emphasis in the original.)
Fink does not deny that profit and purpose are at odds; profit and purpose are “inextricably linked.” However—unlike the short-term focus on quarterly earnings and stock prices—purpose “guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.” He writes:
As divisions continue to deepen, companies must demonstrate their commitment to the countries, regions, and communities where they operate, particularly on issues central to the world’s future prosperity. Companies cannot solve every issue of public importance, but there are many—from retirement to infrastructure to preparing workers for the jobs of the future—that cannot be solved without corporate leadership.
In the next installment of this series, we will look at “purpose” as a new capitalist paradigm. Does late-stage capitalism require corporations to make ESG matters a fundamental principle of operation? Or should investors and business executives continue to prioritize shareholder value as their contribution to the economy?