The shift from active to passive investment strategies in recent years has forced BlackRock to rethink the way it engages with companies, says CEO Larry Fink.
In his annual letter to CEOs, BlackRock chief executive Larry Fink has argued for the responsibility that the private sector has to its stakeholders and to the broader community.
“Society is demanding that companies, both public and private, serve a social purpose,” Mr Fink wrote.
“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
Without a sense of purpose, neither a private nor public company would be able to reach its fullest potential, he wrote.
“And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases or higher education,” Mr Fink wrote.
Mr Fink attributed the greater importance of corporate social responsibility to the pivot to index funds, where active management would have allowed for BlackRock to sell any given company’s securities if it had doubts about its direction or long-term growth.
“In managing our index funds, however, BlackRock cannot express its disapproval by selling the company’s securities as long as that company remains in the relevant index,” he wrote.
“As a result, our responsibility to engage and vote is more important than ever.
“In this sense, index investors are the ultimate long-term investors – providing patient capital for companies to grow and prosper.”
Mr Fink urged company chief executives to consider and articulate their "path to financial performance" – but also how their companies would prepare for potential challenges.
“To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth,” he wrote.
Mr Fink further indicated that the authentic engagement of board members would play a crucial role in long-term strategy development, and also pointed to the importance of diversity on boards.
Stakeholders are now demanding that company leaders display more leadership on a range of issues, he said.
“And they are right to: a company’s ability to manage environmental, social and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process,” Mr Fink wrote.