BlackRock chairman and CEO Larry Fink has made it clear that boards looking for support from the investment giant will have to place a priority on environmental, social and governance (ESG) issues moving forward, as well as stressing board diversity and articulating their long-term strategies.
Fink highlighted those priorities in a letter to CEOs this week.
“We’ve seen ESG start to be emphasized by more than just BlackRock, and that’s why boards need to pay attention,” TK Kerstetter, CEO of Board Resources LLC, and editor at large of Corporate Board Member says. “While there might be the thought that [boards] don’t need to focus on everything being thrown their way by institutional investors today, I wouldn’t ignore what’s being said about ESG and diversity. I think that institutional investors are willing to back that up, when their investments allow.”
According to Fink, financial success is only one piece of the puzzle for prosperous companies, and businesses must make a positive contribution to society while also focusing on diversity and their vision for the future.
“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,” Fink said. “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
“Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset.” – Larry Fink
The statement from BlackRock illustrates what investors are now expecting from companies in these key areas.
“They’re making no bones about being more aggressive if boards don’t understand the long-term strategy for the corporation, and if they don’t understand how ESG and diversity fits into that long-term strategy,” Kerstetter says.
According to Fink, boards of directors have an important role to play in creating a company’s vision and message. He wrote that “the board is essential to helping a company articulate and pursue its purpose, as well as respond to the questions that are increasingly important to its investors, its consumers, and the communities in which it operates. In the current environment, these stakeholders are demanding that companies exercise leadership on a broader range of issues.”
There is a bit of a challenge for companies and boards when it comes to articulating their long-term strategy, as they need to be clear and detailed enough to satisfy investors without tipping their hand to competitors.
“It’s a fine line, but BlackRock is making it clear that it’s something board members had better be able to talk about, because if not, it goes into the column that this board isn’t staying on top of strategy at the level that this investor wants,” Kerstetter says. “BlackRock has made it painfully clear that, right now, they’re not walking that line well enough as far as disclosure or engagement goes.”
The matter of board diversity is also important to BlackRock and has an impact on which companies the investment firm chooses to support.
“Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset,” Fink wrote. “They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.”
Results from Corporate Board Member’s 15th Annual “What Directors Think” Survey show that a majority of boards are already taking action in the area of corporate social responsibility. The survey found that 50% of responding board members said their company has a corporate social responsibility policy in place, with an additional 10.19% saying they have one in the works.
When it comes to the benefits of corporate social responsibility policies, responding board members cited an enhanced brand image and reputation (57.43%), a greater ability to attract and retain employees (56.44%) and increased social awareness to cause/mission (43.56%).