Bear Mountain Capital Inc.

Should Corporations Have a Conscience?

| March 12, 2018

Economy | Giving | Portfolio Management


For decades, it has been conventional wisdom in American business that the one proper objective of corporate managers is to increase the company’s share price. That is the principal behind stock options, which tie compensation to share price. Other considerations, such as worker satisfaction, civic engagement, or environmental impact, have been perceived as irrelevant, except to the extent that they bear on profitability, and thus on share price. The famous economist Milton Friedman made the case for this approach in a 1970 essay in the New York Times, titled “The Social Responsibility of Business is to Increase its Profit.” As the title suggests, Friedman rejected the argument that businesses should be managed with an eye towards “desirable ‘social’ ends” or that businesses should be considered to have a “social conscience.” He ridiculed these notions for their supposed “analytical looseness and lack of rigor,” and declared them “pure and unadulterated socialism.”

Not everyone has agreed with this approach—Friedman was responding to a wave of activist investors and commentators calling on corporate America to put its weight behind social change and environmental concerns. In many European and Asian countries, businesses are expressly run for the benefit of all stakeholders (e.g. workers, community members, suppliers) not just shareholders. But until recently, efforts to bring this approach to the United States have been largely unsuccessful. In just the past few months, however, there have been signals that a sea change in the philosophy of American corporate governance may be underway. This should not be news here in Seattle. Having always been a progressive city, it’s no surprise that Seattle officials have been demanding big businesses help more with social issues.

In 2017, shareholder proposals demanding “climate risk assessments” were adopted by the shareholders of several major energy companies, including Exxon Mobile, despite recommendations in each case by the boards of directors to vote no on the proposal. While these results were newsworthy on their own, the particulars of one of these votes, at Occidental Petroleum, were particularly notable. At Occidental, one of the shareholders voting in support of the proposal also made a public statement in its favor, something this shareholder had not done before. That shareholder was an asset manager called BlackRock, Inc.

BlackRock is no ordinary shareholder. The firm is far and away the world’s largest asset manager, with over $5 trillion under management. And in early 2018, it made more news when it confirmed that its position at the Occidental annual meeting was not a fluke. Every year, BlackRock’s founder, Larry Fink, sends a public letter to CEOs of publicly-traded companies. This year, corporate responsibility was theme of his letter, and in it, Fink staked out a position diametrically opposed to the Milton Friedman’s 1970 gospel of shareholder value:

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.

He went on to state his view that it should be a priority of shareholders to demand that managers comply with these new expectations. “BlackRock recognizes and embraces our responsibility to help drive this change,” he wrote. He concluded with a list of questions “companies must ask themselves,” beginning with three questions that would have been unheard of in corporate America two decades ago: “What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce?”

One example of a large corporation embracing their responsibility to society in Seattle is Starbucks. They have set out a goal to ethically source all coffee, tea, and cocoa by 2020. They do not have to do this, and it will be more costly to do so. But Starbucks is focused on their social responsibility and it has gone a long in way in establishing their reputation in Seattle and across the world.

Efforts to incorporate social responsibility into the fabric of American corporate management are not entirely new. Funds made up only of companies satisfying various social considerations have been available since I started in the industry back in 2002. However, we are seeing more of a critical mass on the topic now and investors are demanding it more now than ever. That the largest shareholder of them all, BlackRock, has taken a very public position in favor of social responsibility is unprecedented and potentially game-changing.

While it is easy to miss stories about seemingly dry topics like corporate governance, keep an eye for them in the coming months, as most public companies hold their annual meetings in the spring. American corporations represent some of the largest concentrations of wealth and capability on the planet, and a shift in how they are managed could have profound effects on not just their shareholders, but on all of their stakeholders—which is to say, all of us.