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.
This BlackRock, Inc. (NYSE:BLK) letter comes on the heels of the JANA/CalSTRS letter to Apple, insisting that it consider the interests of children who overuse their devices, and last year’s successful shareholder votes on climate change backed by State Street and Vanguard.
Collectively, this might appear to be a watershed moment, but the entrenched doctrine of shareholder primacy will block real change, according to Head of Legal Policy for B Lab Rick Alexander. (B Lab is a non-profit organization dedicated to enabling people to use business as a force for good.)
Rick's additional comments below offer benefit corporation governance as the path that companies must take in order to heed Fink’s call to action. Rick is an authority on benefit corporations, having drafted the initial version of Delaware’s benefit corporation legislation in 2013, and authored the newly-released Benefit Corporation Law and Governance: Pursuing Profit with Purpose.
Head of Legal Policy, B Lab
Author, Benefit Corporation Law and Governance: Pursuing Profit with Purpose
The truth is that, in each of these activist shareholder examples, the shareholders calling for corporate responsibility were careful to speak in the language of long-term company shareholder value.
That is, in each case the investors made the case that companies would do well by doing good, at least in the long run.
Thus, these investors are still speaking the language of “shareholder primacy,” a legal and economic doctrine in which shareholders and courts insist that the first priority of corporations is to produce a financial return.
No matter the cost to the community and the planet. That is, in each case the investors felt compelled to make the case that individual companies would do better for their shareholders by creating positive social impacts, at least in the long run.
Such arguments are good, as far as they go: it is certainly the case that a company can make money in the long term by investing in innovative products that improves lives, and that companies can protect the environment and their bottom lines by limiting waste. But there is no magic convergence between financial success and broader concerns. There are some cases where companies just have to “leave money on the table” to preserve our social, economic and environmental systems. And for universal owners, who have long investment horizons and diversified holdings, such systems are far more important than any single company.
The root cause of corporations’ failure of social purpose is thus not a lack of strategic vision on the part of managers. Rather, it is the cramped set of alternatives available, even to ethical managers, in a system dominated by shareholder primacy. We cannot address corporate behavior without addressing corporate governance: in order to fully realize the vision articulated in the BlackRock letter, managers first need a tool to counter shareholder primacy.
Benefit corporation governance is a rapidly growing new governance model that gives responsible companies and investors the ability to make those hard choices. Without it, legal and market forces will create pressures that will inevitably lead directors to maximize shareholder return, whatever the social or environmental cost. And in the long-run, such “shareholder primacy” will punish long term investors who depend on healthy markets. As Al Gore put it:
Investing is a means to secure our future well-being. This requires a broader consideration by fiduciaries of systemic effects-- for example, consideration of how investments can create better markets tomorrow, rather than simply focusing on “beating” the market today.
Benefit corporations create opportunities for investors and the business community to make a positive impact by allowing them to balance a company’s need to provide competitive financial returns with the needs of our economic, social, and environmental systems.
Since the first benefit corporation legislation was enacted in 2010, more than 5,000 benefit corporations in 35 states have formed in the United States. They have raised more than $1.5 billion from investors in dozens of financings.
Last year saw the creation of the world’s largest benefit corporation, DanoneWave, with more than $6 billion in sales, and the first IPO of a benefit corporation, Laureate Education.
The law is spreading to other countries as well—Italy has adopted a statute, and legislation has been introduced in three counties in South America, and is being considered in a number of other countries.
More about Rick Alexander
Frederick (Rick) Alexander is Head of Legal Policy at B Lab, a non-profit organization dedicated to enabling people to use business as a force for good. In this role, he works with other lawyers, company executives, investors, legislators, and regulators around the world, seeking to create corporate governance structures that lead corporations to contribute to a healthy, stable society and planet.
With 30 years’ experience in law, Alexander was named as one of the 10 most highly regarded corporate governance lawyers worldwide by The International Who’s Who of Corporate Governance Lawyers 2012. Prior to coming to B Lab in 2105, Alexander was the managing partner of Morris, Nichols, Arsht & Tunnell in Wilmington, Delaware, and prepared the initial drafts of both the Delaware public benefit corporation legislation and the ABA Benefit Corporation White Paper.