In the Midst of Pandemic, a Misguided Focus on Stakeholders
Larry Fink, CEO of BlackRock, and Martin Lipton, a named partner in the law firm of Wachtell, Lipton, Rosen & Katz, are major players in corporate governance. Therefore, when they speak, people listen. Perhaps surprisingly, they find common ground in having as their primary focus the catering to stakeholders, while social value—the goods and services created by corporate America and the wealth that it creates for shareholders—is simply taken for granted. Moreover, they share a belief that institutional investors, no matter how uninformed, should be partners in the corporate endeavor. Now that we are going through the coronavirus pandemic, it should be clear that this approach is not sustainable, requiring social value and shareholder wealth maximization (“SWM”) to regain center stage.
In Fink’s 2018 letter to CEOs, he argued: “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. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
Social purpose has as its clear objective the satisfying of stakeholder interests but without regard for the social value that their companies create. How can this be? Can you imagine our economy without many of the goods and services produced by its corporations, including the hundreds of thousands of small businesses that use the corporate form? Unfortunately, with the coronavirus pandemic upon us, this is something that we can now easily imagine. Yes, the air is cleaner, but with more than 40 million U.S. workers unemployed as a result, the human suffering has been astronomical. The pandemic puts into perspective that it is not social purpose that is important but the goods and services that our companies produce. It is the creation of this social value that is a company’s “positive contribution to society.”
Moreover, how can Fink ignore SWM as the objective of social value creation? As a general proposition, SWM is only a default objective because unanimous shareholder consent, or a clause in the corporate charter, or being established as a public benefit corporation may allow for SWM to be a different—or, at least, a nonexclusive—objective. However, SWM is a tried-and-true objective that allows a company to be successful in competitive input and output markets, to avail itself of low-cost funding in capital markets, and to minimize the risk that it will become a target of acquisition in the market for corporate control. Therefore, it is easy to argue that a board has both a legal and an economic obligation to seek SWM as its corporate objective.
More than two years after Fink’s letter, in posts on the Harvard Law School Forum on Corporate Governance and the Columbia Law School Blue Sky Blog, Lipton, along with his partners William Savitt and Karessa L. Cain, proposed a new definition of corporate purpose that is strikingly similar to how Larry Fink envisions social purpose:
The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners [italics added] in supporting the corporation’s pursuit of this mission.
As you can see, this definition also focuses on stakeholders and ignores social value and SWM. It also suffers from the same criticisms as Fink’s social purpose.
In regard to shareholders being “essential partners,” it must be understood that not all shareholders can participate. Only the largest would be invited. For example, BlackRock is one of those shareholders that would get a seat at the table.
Based on BlackRock’s actions and statements, it is all-in on the idea of being an essential partner. According to Larry Fink’s 2020 letter to CEOs, BlackRock will be requiring its portfolio companies, virtually every public company, to disclose data on “how each company serves its full set of stakeholders.” Moreover, noncompliance is not acceptable. According to Fink, “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” How BlackRock votes during this proxy voting season will not be known for some time. However, with one month to go in the season, Hannah Orowitz and Brigid Rosati of Georgeson recently reported that, at least in the area of climate change, BlackRock “is taking a firmer stance … than in the past.”
The role of essential partner is not a role that BlackRock should be playing. As I discuss in my new article, “The Risks and Rewards of Shareholder Voting,” a collective action problem in shareholder voting leads to uninformed institutional investors. This is particularly true of BlackRock, as an investment adviser to passive index funds. Such an investment adviser does not expend any effort in trying to value the firms that are held in the portfolios of the mutual funds and ETFs that it manages. If they know nothing about their value, they certainly won’t know anything about how to manage the stakeholder relationships of these companies. That is why BlackRock and any uninformed institutional investor cannot be an “essential partner.” Yes, institutional investors must be placated when they leverage their enormous voting authority to act opportunistically, but they cannot be true partners in the realization of a portfolio company’s corporate purpose.
Both Lipton and Fink are misguided in their understanding of corporate governance. Whether one is trying to define corporate purpose or social purpose, the goods and services produced by a company must be included in the definition. The creation of this social value is what allows a company to make a “positive contribution to society.” If nothing else, the coronavirus pandemic should make Lipton and Fink realize that the promotion of social value and SWM—not stakeholders—should be their top priority, during and after the pandemic. Tens of millions of jobs are counting on it.
