BlackRock chief Larry Fink has predicted a ‘fundamental reshaping of finance’

The Sunday Times, January 19 2020

The balding, bespectacled billionaire posed a question: “What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding?”

Larry Fink already knew the answer: it is a scenario that must be avoided. In his annual letter to chief executives last week, the boss of the world’s biggest fund manager, BlackRock, predicted “a fundamental reshaping of finance” would take place to tackle the risks posed by climate change.

This week the 67-year-old American takes his plan for “investing for a better future” to the annual gathering of politicians, business leaders, economists and lobbyists in the Swiss ski resort of Davos.

It will divide the invitation-only attendees. To name just two: Donald Trump, the sceptic, and 17-year-old Greta Thunberg the climate-change activist.

Fink’s new strategy typifies the topics that are up for debate — saving the planet, fairer economics and better business — and will resonate with anyone who has listened to the bosses of big businesses in recent months.

Last summer, when JP Morgan’s Jamie Dimon, another Davos regular, led a move by business leaders to throw out the idea of shareholder primacy, he warned that the American dream was “alive, but fraying”.

Almost 200 bosses — including Fink — put delivering value for shareholders last on a list of five factors for determining their “corporate purpose”. They put customers, employees, suppliers and communities first.

Laudable as the realignment may sound, scepticism abounds about the response from businesses and investors to attention being diverted to these other stakeholders if markets go into reverse, while legislation still focuses on their duties to shareholders.

Fink’s promise on climate change was quickly dissected. BlackRock manages $7 trillion (£5.3 trillion) of assets, some $1.8 trillion of which is actively invested in stock markets. Fink’s climate-change pledge equates to about $500m of investments. It is not clear what has already been ditched, but Bloomberg reported that BlackRock would probably not need to sell London-listed Glencore, in which it owns a 6% stake, or Anglo American or BHP, because the three mining giants did not breach Fink’s threshold test of deriving 25% of their sales from thermal coal.

The underlying sentiment of Fink’s move was, though, broadly applauded. It exemplifies the trend sweeping through boardrooms on both sides of the Atlantic as executives are forced to look at the changing world.

Dennis Kelleher, head of the Washington think tank Better Markets, said this “new-found concern for broader constituencies” stems from a “once-in-a-century level of income inequality where the yawning gulf between the top 1% and everyone else is bigger than it was in the 1920s, right before the Great Crash”.

At the end of last week, the International Monetary Fund (IMF) also highlighted inequality, saying that the trend was similar to the 1920s. In the UK, it said, the top 10% control nearly as much wealth as the bottom 50% — a trend that is mirrored across the OECD. Kelleher said: “We’re left with the age-old problem, which is whether or not corporate America’s rhetoric is going to have any impact on reality.”

American stock markets scaled fresh highs last week: the Dow Jones is now at four times its post-financial-crisis low, while the FTSE 100 has doubled. Booming markets may provide an easier backdrop for bosses to make pledges about putting other stakeholders ahead of shareholders. However, many corporate governance experts believe change is inevitable. “Twenty years ago, if you were a company and your shareholders were happy and all your other stakeholders were unhappy, you could say, ‘Well, I’m doing what really matters,’ ” said Trelawny Williams, who spent two decades in corporate governance at fund management giant Fidelity International.

Now, the shareholders are themselves under pressure. Fink admitted that BlackRock’s move was being driven by demands from clients. They are being urged to consider other stakeholders, too, such as politicians, employees, suppliers, customers and the younger generation. Sir Donald Brydon, the former fund manager who chaired the London Stock Exchange and now the tech group Sage, said: “These are fundamental shifts between business and society. You will not have young people coming to work for you unless you embrace wider values. Customers will not select you for misbehaviours.”

Even so, can shareholder primacy really be cast aside? Roger Barker, head of corporate governance at the Institute of Directors, added a cautionary note. “We still have to recognise in the US and the UK that companies are operating within the system based on shareholder primacy [in its underlying corporate law],” he said. “So the narrative on the move to a stakeholder approach is more rhetoric at the moment than it is reality.”

There have been changes. In 2006, the Companies Act began requiring directors to “pay regard” to other stakeholders, to the extent that they might affect the prosperity of shareholders.

Under a shake-up by Theresa May’s government, companies will now have to explain how they take the views of employees into account — while not putting them on boards — and publish pay ratios and gender gap data.

In other parts of Europe, shareholder primacy has been further diluted. In Holland, for example, works councils can ask the courts to block takeover bids.

Lord (Paul) Myners, who was City minister during the financial crisis, reckons most companies have long been aware of their wider societal purpose, but institutional investors’ need to produce short-term performance means that “all the good talk about a broader array of responsibilities diminishes to nothing the minute a takeover bid comes along at a 30% premium”.

Corporate failures often put the focus on the behaviour of companies and their directors — witness BHS, Carillion and Thomas Cook — but Sacha Sadan, director of corporate governance at Legal & General Investment Management, said the ideal was a consistent approach. “We want good governance all through the cycle as a protection against downside risk,” he said.

Andrew Ninian, director of stewardship and corporate governance at the Investment Association, said fund managers wanted to ensure “that the companies they invest in are being run to generate long-term returns for their shareholders and ultimately savers”. Nevertheless, he added: “Alongside traditional financial and business risks, investment managers are shining a light on issues such as diversity, executive pay and environmental risks.”

Trelawny Williams, now a senior adviser at PR firm Brunswick, said it was a matter of time “before directors’ duties get redefined to more formally accommodate some of these other stakeholders”.

For some, change will not come too soon. Sam Johar, chairman of headhunter Buchanan Harvey, said: “Somewhere along the way, maximising shareholder value distorted into redistributing wealth from the many to the few. We must fix our system before it loses its legitimacy.”

It is a sentiment increasingly shared — at least on the surface — by Fink, Dimon and the other business leaders brushing shoulders in Davos.

While signs of change are emerging — Bank of America has published its first report on human capital, computer giant Dell has set goals for 2030 with commitments to various stakeholders and JP Morgan is helping people with criminal backgrounds back into work — the world will be watching for evidence that the rhetoric is converted into hard action.

Climate change triggers green rush in boardrooms
Boardrooms are feeling the heat over climate change, writes Andrew Lynch.

The appointment of a long-time environmental crusader to a FTSE 250 company underlines how seriously the issue is being taken.

Julia Hailes, who will become a non-executive at the storage supplier Big Yellow in March, co-wrote The Green Consumer Guide. She has served on boards in the charity sector, including Keep Britain Tidy, as well as an investment trust, Jupiter Global Green.

“Big Yellow realised that sustainability was important — and to signify how important, getting someone [like me] on the board was the next step,” said Hailes, 58.

Big Yellow’s executive chairman, Nick Vetch, thinks sustainability will grow in importance but the goals need to be realistic.

“You can think you are doing good by actioning ‘X’ and then find that ‘X’ had unintended consequences you didn’t really understand,” said Vetch, who co-founded the company in 1998.

“Climate change is now top of the agenda,” said Carlota Garcia-Manas of Royal London Asset Management’s responsible investment team. Vetch saw that during his last round of investor meetings. “We had about 20 meetings and in only one was sustainability not mentioned” he said. Gillian Karran-Cumber-lege of the headhunter Fidelio Partners said boards were seeking more competence on this issue. “As we see investor pressure pick up, it’s a short step to thinking: we need somebody on the board who understands the science – and the disclosure,” she said.

A year ago, the veteran non-executive director Julie Baddeley and some colleagues clocked what was going on. “The climate-change discussion was not taking place in the boardroom as extensively and deeply, and with as much understanding, as we felt it needed.”

They set up Chapter Zero, a forum which now has more than 400 members. “The idea is that all non-executives should become sufficiently conversant with the issues that climate changes brings, and what that means for their companies, so they can take part in a proper debate,” said Baddeley, senior independent director at the aerospace-to-property conglomerate Marshall Group.

“We see this as a board issue like other board issues that affect risk assessment, accounts or strategy . . . it should be a topic that all board members are sufficiently aware of to discuss.”