Should Corporations Step Into the Governmental Vacuum?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In this year’s annual letter to CEOs, BlackRock CEO Laurence Fink once again advocates the importance of a long-term approach, at the same time mourning the prevalence of political dysfunction and acknowledging the resulting increase in public anger and frustration: “some of the world’s leading democracies have descended into wrenching political dysfunction, which has exacerbated, rather than quelled, this public frustration. Trust in multilateralism and official institutions is crumbling.” For a moment, I thought he was going to veer off into “American carnage,” but instead his focus is on the responsibility of corporations to step into the breach: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.”

You have to admit that Fink’s newest call to CEOs represents quite a turn of events, especially when taken together with last year’s letter advocating that companies recognize their responsibilities to stakeholders beyond just shareholders—to employees, customers and communities. (See this PubCo post.) In decades past, the stereotype of the business executive was a Republican in a tidy gray suit focused solely on the bottom line, while government was viewed as the entity fulfilling the social contract, caring for the elderly and the sick, addressing issues like inequality and the environment and expressing moral and political outrage when the appropriate time came. With current government essentially stymied or withdrawing from those functions, the tables have turned and now, in many cases, institutional holders and corporations have become engines promoting—albeit with baby steps—corporate social responsibility. (See, e.g., this PubCo post on gun safety, this PubCo post on climate change, this article on CEOs boycotting the Davos-in-the-desert conference and this PubCo post on board gender diversity.)

Fink frames his letter as a discussion of the concept of corporate “purpose.” What does Fink mean by “purpose”? It is, he says, “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.” He insists that his focus on purpose is not inconsistent with profits; rather, in his view, purpose drives long-term profitability by providing a whole catalogue of benefits: promoting “strategic discipline”; unifying management, employees and communities; advancing ethical behavior; creating “an essential check on actions that go against the best interests of stakeholders”; guiding culture; and providing “a framework for consistent decision-making, and, ultimately, help[ing] sustain long-term financial returns” for shareholders.

Fink acknowledges that CEOs feel the pressure of various stakeholders (including employees) to “wade into sensitive social and political issues—especially as they see governments failing to do so effectively,” and that what is right for one company may not be right for another. Nevertheless, in the absence of action from government, he contends, “the world needs your leadership.” Although companies can’t solve every problem, in some cases, the problem can’t be solved without companies’ leadership. One example he provides is retirement, given that the shift to 401(k) plans has left many workers largely unprepared for retirement. No specifics are offered, but Fink suggests that companies must “embrace a greater responsibility” to help workers navigate this issue, with the goal of making the workforce more stable and engaged and the local community more secure.

Of course, not everyone shares Fink’s view. As reported in the NYT’s DealBook column, one real estate billionaire (not the one in the White House) commented that “I didn’t know Larry Fink had been made God,” and Warren Buffett, the chair of Berkshire Hathaway, said that he didn’t “believe in imposing my political opinions on the activities of our businesses.”

Fink observes the trend toward corporate social responsibility will only accelerate as the millennial generation increases its proportion of the workforce. As evidenced by recent activity, including walkouts over the past year, employees have not been afraid to express “their perspective on the importance of corporate purpose,” and Fink expects this trend to continue. Future transfers of wealth from boomers to millennials should also accelerate investor focus on issues of ESG.

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