| February 05, 2018
While the ad industry has been debating whether purpose is a business driver or not, Larry Fink, Chairman and Chief Executive Officer of Blackrock Inc., has no doubt and is willing to use the $1.7 trillion in active funds managed by Blackrock to push companies to make positive contribution to society.
When talking about ‘purpose’ I often refer to the need to be ‘authentic’. Implicit in the use of that word is that the company should walk the talk, that it should be wholeheartedly committed to making people’s lives better in some way, and not just because it makes a good advertising platform to sell more stuff. More than that, it infers that the company is in it for the long-term not just a campaign.
With that in mind I make no apologies for quoting the following chunk of Fink’s letter,
“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.
Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.”
Why will a company provide subpar returns to investors? One reason is because the company will have less ‘organic slack’ to help it stave off competition. Instead of being able to draw on existing employee expertise, new products and the latest technology it will be forced to cut margins and lower prices. The vicious, downward spiral will begin.
Fink stresses the importance of long-term strategy and good governance, stressing that the board is essential to helping a company articulate and pursue its purpose. Part of that remit must be to ensure that the commitment to the company’s purpose is driven across the entire organization and that incentives are aligned with long-term goals not short. Right now, far too many companies encourage short-termism in all aspects of their business simply because of the way they incentivize their people. And if the company is to leverage its purpose to the full (and build resilience to competition) I would argue that it needs to talk about what it is doing to its customers and community, it needs to publicize its actions and commitment. But what do you think? Please share your thoughts.