What does Larry Fink have against profit? Fink is the CEO of the mega investment firm BlackRock, and in an open letter to CEOs earlier this month he calls for a ramping up of social investing and social management of corporate America.
That these firms might exist to earn profits is left unstated. Meanwhile, one reading Fink might conclude BlackRock believes businesses exist to (a) fight low wage growth, (b) furnish retirement, (c) increase worker saving, (d) provide job security, (e) reduce societal anxiety and polarization, (f) spend on infrastructure, (g) counter adverse effects of automation and climate change, and (h) serve a social purpose. Such are the principles of Fink’s “new model of shareholder engagement.”
Fink’s letter is just the latest salvo in an old academic fight that has been waging in the United States for decades over what obligations firms owe society. But it is more than that, given BlackRock’s influence over the firms in which it invests.
What’s new in his argument is his call for expanded corporate activism in response to the failures of government. Fink writes:
We … see many governments failing to prepare for the future. ... As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. 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.
Let’s admit: There’s something here that appeals to anarcho-capitalist principles, pointing to a world in which things like infrastructure or retirement are the sole domain of private actors. But beyond that, there is much to criticize about what Fink thinks.
Some thoughts.
First, an ominous omission from Fink’s letter is any explicit use of the word profit as something that should be considered a legitimate firm goal. If investors took Fink seriously, they would bail out of BlackRock’s inflated stock, the price of which has risen 16 percent in the last three weeks.
The reason is that, however laudable board diversity or carbon emissions or payroll size or retirement may be, none of this matters if firms aren’t first concerned with maximizing revenues and minimizing costs for another day. Indeed, those that forget the primacy of profit are not long for this world.
Is this not the explanation for hardships faced today by firms such as McDonald’s and Sears? Are not consumer focus and a willingness to adjust to changes in tastes, preferences, and technology why firms like Starbucks and Walmart persist? In the market, profits signify who serves the public best. Firms that downgrade their importance are more likely to struggle and lose market share to competitors. Some will fail.
Make no mistake: The secondary, “social justice” goals Fink extols can only be addressed in the long run by firms that put profits first. Only in Wonderland would investors pool resources to start a firm so that workers comprising it would have health insurance.
Second, Fink, a driven and smart man, knows baby boomers in 2018 now control most of the wealth and institutions in the US. In this sense, his letter can be seen as a shrewd attempt to market BlackRock to this generation — an effort that would have failed 20 years ago, when a less culturally Marxist generation owned most of the wealth. If so, then welcome to a world in which investment firms must downgrade the importance of profits to account for the economic illiteracy of the generation where wealth dominates.
Third, let’s not forget that large, crony firms like promoting myths regarding the value of broadened corporate responsibility because — to the extent they are successful— they impose costs on potential competitors. Anything that causes them to divert resources from consumer satisfaction protects existing firms from upstarts. If Tower Records, the once iconic record chain, could have forced its competitors to be less focused on developing its streaming platforms and more on maximizing payrolls, would it still be around today?
Finally, and most troubling, Fink’s explicit omission of profit from his letter implies that corporate America, following nine years of QE, bailouts, protectionism, and ZIRP, now believes profit is a given and can be safely ignored. Isn’t that why we pay government planners to micromanage the economy, after all? If such a belief is taking root among the politically well-connected firms, then the next correction will not only readjust malinvested capital, but bad ideas too.
