For the last 47 years, since September 1970, financial markets have been guided by the maxim articulated by Milton Friedman on the “rules of the game” for business. “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
On January 18th this maxim was overturned by the CEO of BlackRock, the world’s largest institutional investor. In his letter to CEOs, Larry Fink said, “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.”
Fink’s articulation of this new framework for the role of business in society will undoubtedly be dismissed by some as a public relations move. It is not. It is based on a firm understanding of our current juncture as we continue to move to a globally integrated economic system in which the relationship among financial markets, business, and governments and their relative power and influence has changed profoundly. As Fink notes, “Since the financial crisis, those with capital have reaped enormous benefits. At the same time, many individuals across the world are facing a combination of low rates, low wage growth, and inadequate retirement systems. We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining.”
Fink’s letter acknowledges the reality that we all implicitly understand, namely that the social contract that has governed western democracies and markets since the Second World War no longer holds. A world in which the business of business is business and government takes care of the rest is no longer viable in a global economy in which half the world largest economic powers are businesses and capital flows globally. There is no more important example in this shift in relative economic power and influence than that BlackRock’s $5.7 trillion in assets under management now exceed the U.S. government budget of $4.17 trillion. How these assets are invested and managed has profound implications for the wellbeing of the societies in which their clients and their stakeholders live and work.
Evidenced by Fink’s letter, BlackRock has recognized and taken on this “governance” challenge forcibly, and in so doing is taking an important step in redefining “the rules of the game” for business in a 21st century social contract. This will move us well beyond the focus on ESG and “do no harm” metrics that defined corporate responsibility in the late 20th century to a more profound discussion and focus on the role of business leadership in society and how it will be defined, managed and held accountable.
Among the questions that must now be addressed are, what exactly does social purpose mean for a firm and how it is governed and led? What kind of corporate boards are now needed if companies are expected to articulate and manage their social purpose and strategy? What is the role of the CEO of global firms—not simply as a business leader but a “statesman,” a de facto part of global governance? As the Economist noted in a 2016 editorial, “The CEO-statesman is not content with just accepting a job in the government; nor does he/she simply lobby behind the scenes. A chief executive needs to have values, and preach them.”
At the High Meadows Institute, we are exploring the answers to these questions and are working with BlackRock, Vanguard and other finance and corporate leaders to create the building blocks for a model for 21st century corporate governance that can support the expanded role of business leadership and responsibility in society.