This article was first published in the latest issue of the Moneyweb Investor. Click here to read the magazine in full, at no cost to your pocket.
Last week Larry Fink, the CEO and co-founder of investment firm BlackRock published his annual letter to S&P 500 CEO’s entitled A Sense of Purpose. He runs an enterprise that manages $6 trillion in global assets, so I imagine that people tend to sit up and pay attention when he talks. But this particular letter stirred more debate than usual – quite timeously in my view.
Fink urged CEOs to recognise that their companies must serve a social purpose. It’s a theme that he has dwelt on in the past. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” he wrote.
Essentially he was asking whether the traditional capitalist model that sees a company run for the benefit of shareholders alone is appropriate in today’s world.
He notes that the world is changing. “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….
“The time has come for a new model of shareholder engagement.” This, he says, should go beyond proxy voting at AGMs and extend to meaningful engagement with companies and their management teams.
Predictably impact investors and the well intentioned were delighted with this missive of support from a member of investment royalty. Others however, were less impressed: “Fink’s social purpose has no grounding in economics,” Adrian Day, CEO of Adrian Day Asset Management told Barrons.com. Billionaire investor Sam Zell went a step further saying that Fink and others like him were “extraordinarily hypocritical” to push companies for more social responsibility. “I didn’t know Larry Fink had been made God,” he told CNBC.
But the world is changing. Now is the time to debate capitalism as we know it. In the past it was easy to accept that a company was run for the benefit of shareholders, providing it paid its share of taxes and didn’t run a sweatshop. But under the current capitalist system the divide between rich and poor is widening not narrowing, job security is increasingly tenuous and some of the world’s greatest companies don’t pay their share of taxes.
In his book The Four, which details the rise of tech behemoths Amazon, Google, Facebook and Apple, author and New York University professor Scott Galloway notes that fewer and fewer companies are aggregating more and more power. “These companies avoid taxes, invade privacy, and destroy jobs to increase profits because….they can.”
Facebook for instance is valued at $535 billion and employs roughly 17 000 people. Compare that to Disney, which is worth a fraction of that at $167 billion but employs 185 000 people, or Unilever which employs 169 000 people and is worth $168 billion.
In the past executives and investors got rich and employees were comfortably off. Today a select few investors and executives are becoming über wealthy while a diminishing middle class holds on with its finger tips. And lets not even ask what is happening to the working class.
With the market hitting high after high and corporate profits on the way up, it may be time to debate capitalism as we know it. I don’t have the answers, but if we don’t it may be that taking into account customers, employees, suppliers, the environment, and other potential constituencies will be the least of a company’s responsibilities.