In 1979, the industrialist George Weyerhaeuser told me, “We have a license to operate from society, which can be revoked if we violate its terms,” referencing a corporate social responsibility movement popular at the time. BlackRock CEO Larry Fink’s 2018 letter to CEOs is a new clarion call for CEO attention to a similar sentiment, rebranded as ESG (environmental, social, governance).
This mega-investment firm manages $6 trillion in investments through pension funds, mutual funds and exchange-traded funds, ranking it as the largest investor in the world—a platform that makes Fink hugely influential in governance dynamics.
In Fink’s words, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
It’s not a new argument. From utopian 18th-century industrialists to the 1970s founders of the Business Roundtable (BRT), many have argued that doing good is not antithetical to doing well. While the BRT has fluctuated, the philosophy is evident in the practices of progressive business leaders like Howard Schultz of Starbucks; Ron Shaich of Panera; Indra Nooyi of PepsiCo; as well as Larry Page and Sergey Brin of Google/Alphabet.
“CEOs responding to Fink’s call to action must walk a fine line, watching for often-overlooked execution pitfalls in their pursuit of virtue.”
In calling on today’s businesses, Fink referenced the need to fill a void. “Society increasingly is turning to the private sector and asking that companies respond to broader societal challenges,” he wrote. TPG Capital’s James Coulter agrees: “It is time for us to engage in a social mission.”
But, investor Sam Zell’s response to BlackRock was to ask, “Who made Larry Fink God?” As Chicago economist Milton Friedman famously decried in 1970, “The only responsibility of business is the bottom line!” Pioneering investor activist Nell Minow has also urged, “Don’t give our money to the opera and your favorite museum. Give us the business profits back in dividends, and we’ll decide what causes to support with our money.”
Clearly, CEOs responding to Fink’s call to action must walk a fine line, watching for often-overlooked execution pitfalls in their pursuit of virtue. The ESG “debate gap” requires ESP (extra sensory perception) regarding these key caveats:
Timeframe Traps. The payouts may not be in today’s stock price. Even skeptic Friedman noted “it may well be in the long run interest of a corporation… [to] devote resources to providing amenities” to the community. Michael Barnett and Robert Salomon’s research in the Strategic Management Journal shows a strong relationship between ESG and financial performance.
Philanthropic Focus. Instead of dabbling in support of the CEO’s favorite pastime, Minow supports ESG moves that reinforce the brand and “align with your company’s direction.”
Constituent Conflict. Longstanding CSR funds like Domini Social and Calvert have very different priorities among sustainability, health, product safety, work practice and governance cultures.
Greenwashing Returns. With the ESG fund entry of Janus and other activists notorious for short-term priorities, we are reminded of the pre-emptive expropriation of “sustainability” by firms such as BP before the revelation of its massive misconduct.
Mindless Metrics. Even Fink’s BlackRock has made misguided calls, voting with avaricious activists based on mechanical governance checklists, violating its own better-informed expert judgment. Like the Heisenberg Principle in physics, they’ve confused the phenomena with its measurement tools.