Reputation and sustainability define long-term profitability of companies, says BlackRock leader
On 18 January, the most important annual letter for corporate management was made public. Larry Fink, chairman and founder of BlackRock, the world's largest fund manager with 10 trillion dollars in assets under management, wrote to the directors of his investee companies some key points about the global economic situation. It is not the first time that he has announced measures in favour of transparency and sustainability in his circular. This time, the business leader focuses on how the pandemic has accelerated social and economic changes that threaten social trust in companies and institutions. BlackRock is the second largest shareholder in Apple and Microsoft and the third largest in JP Morgan; in Spain it is present in the capital of 18 Ibex 35 companies. It is worth taking note of Larry's messages.
The author of the letter argues that in today's global and interconnected world, a company only creates long-term value when it fulfils three conditions: being an organisation with consistent purpose and values, ensuring the mutual benefit of its stakeholders (employees, customers, suppliers, local communities...) and contributing to the common good in a reciprocal relationship with the environment.
Firstly, we are witnessing a paradigm shift that inaugurates a new framework for the relationship between society and business. According to Larry Fink, the current crisis demands consistent leadership from companies and institutions, with a clear and shared purpose, a coherent strategy and a long-term vision. The company's mission acts as a "lodestar" in today's changing and disruptive environment. The pandemic has accelerated the operational and technological transformation of business but, above all, it has struck a chord: never before has the relationship between employers and employees changed so much.
The second message is about the relational orientation of capitalism in recent years. Companies must work not only for their shareholders, but for all their stakeholders and especially their employees. It is no longer just a question of pay and flexibility. Issues of work-life balance and maternity, intrinsic motivation, equality and physical and mental health are important. Deepening the link with employees means opening up listening systems and integrating their expectations into organisational decision-making. Companies should aim to have a social agenda that is connected to their purpose.
Finally, organisations will be recognised not for the achievement of their objectives, but for the degree to which they contribute to the common good. The chairman of BlackRock again reminds us that climate risk is investment risk, and announces large amounts of capital allocated to the decarbonisation of the economy and the energy transition. Markets are demanding long-term returns but also a real commitment to economic, social and environmental sustainability. Sustainability (understanding the present to improve the future) has proven to have a broad social consensus, which would justify strengthening collaboration between governments and the private sector. The pandemic has again been a good observatory of this global trend.
The business leader does not shy away from criticism of this vision of lobby capitalism. Very early on in the letter he takes up the gauntlet: "The capitalism of the stakeholders it is not politics; it is not an ideological agenda; it is not culture woke. It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers and communities on which your business depends to thrive". Their ambitions are clear: legitimate profits and long-term profitability. But yes, the market has changed the rules.
Larry Fink, finally, reminds us that the breakdown of public confidence in the stakeholders impacts on the reputation of institutions and their prospects for economic growth. There is a need to realise that restoring trust is vital for the very sustainability of the system. But trust is not a tangible asset, it is an intangible principle of governance. It urgently requires an overhaul of governance systems and a strengthening of the reputation management of organisations. This is no longer just about distributing dividends.
Santiago Fernández-GubiedaDirector of Development of the Centre for University Governance and Reputation at the University of Navarra.