In this new paper from the Rock Center for Corporate Governance at Stanford, “Stakeholders and Shareholders: Are Executives Really ‘Penny Wise and Pound Foolish’ About ESG?,” the authors examined survey data from CEOs and CFOs of companies in the S&P 1500 to understand the extent to which the respondents believed that, in business planning and long-term strategy development, they took into account and attributed importance to the needs of non-investor stakeholders, such as employees, unions, customers, suppliers, local communities, government and regulatory agencies and the public at large.
It would be hard to miss the increased focus of investors—especially institutional investors—on environmental, social and governance issues. From multiple surveys showing the importance to investors of ESG factors to near-campaigns conducted by large asset managers promoting ESG as a component critical to long-term value creation, it sure seemed as if most of the private sector was getting on board. Indeed, in 2018, Laurence Fink, the Chair and CEO of asset manager BlackRock, wrote in his annual letter that, given some of the failures of governments, “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges…. 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.” [Emphasis added.] But then, near the end of April, the Department of Labor issued a new Field Assistance Bulletin No. 2018-01, which provides guidance for plan fiduciaries about investments under ERISA. While Fink’s letter may have seemed like an assault on Milton Friedman’s theory of the primacy of maximizing shareholder value, the new DOL Bulletin has wrapped Friedman’s theory in an embrace so warm it would make the presidents of the US and France blush. (Ok, that’s a big exaggeration.)
While the topic of last week’s fourth SEC-NYU Dialogue on Securities Markets was shareholder engagement—focusing on the roles of institutional and activist investors— the real hot topic was the recent letter to CEOs from BlackRock’s Laurence Fink, which was at least mentioned on every panel. (See this PubCo post.)