Last year, BlackRock CEO Larry Fink announced the global investment firm’s intention to consider companies’ social missions in determining who would get their investment dollars. Phil Brown, Intelligize’s Chief Strategy Officer, shares how this move indicated a growing wave of third-party stakeholders exerting influence over organizations.
It was the shot heard ‘round the business world: In a 2018 letter to CEOs, BlackRock Chairman and CEO Larry Fink announced that the world’s largest investment firm would evaluate companies based on their social impact, not just their bottom lines.
“Society is demanding that companies, both public and private, serve a social purpose,” Fink said. “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.”
When a firm with $6 trillion in managed assets speaks, Corporate America listens. And BlackRock is not a lone voice. Today, a cross-section of vocal stakeholders – including institutional investors, proxy advisors and employees – who lack the authority of the Securities and Exchange Commission (SEC) to police the behavior of public companies are, nonetheless, increasingly taking steps to shape their behavior. These third parties have become dynamic forces in calling for corporate governance reforms.
Given the trillions of dollars in investment capital under their control, institutional investors like mutual funds and pension plans are among the most influential of these third-party “shadow regulators.” One of the issues they are most concerned about: corporate diversity.
Fink doubled down on BlackRock’s commitment to corporate social responsibility in his 2019 letter. Singling out issues that BlackRock would scrutinize closely, he mentioned “governance, including your company’s approach to board diversity.”
In fact, BlackRock has called out companies that it views as being behind the times on board diversity. The investment house’s Global Head of Stewardship, Michelle Edkins, has derided the “1880s” attitudes she says BlackRock found when surveying companies in the Russell 1000 index, many of which had fewer than two female directors.
Similarly, The Vanguard Group Inc., which has nearly $5 trillion in global assets under management, has expressed its desire to see corporate boards diversify their ranks. “When the board contributes the right mix of skill, expertise, thought, tenure and personal characteristics, sustainable economic value becomes much easier to achieve,” wrote then-Vanguard CEO F. William McNabb III in a 2017 open letter to public companies.
“A thoughtfully composed, diverse board more objectively oversees how management navigates challenges and opportunities critical to shareholders’ interests.”
BlackRock and Vanguard have plenty of company in their concern over board diversity. Based on interviews in 2018 with dozens of institutional investors controlling a combined $32 trillion in assets under management, the EY Center for Board Matters singled out board composition and enhanced diversity as investors’ top priorities for companies.
Pension Plans Get In On the Act
For its part, CalPERS, the agency that oversees the pension and health benefits for California’s public employees and retirees, is leveraging its proxy votes to press companies to improve. CalPERS disclosed in 2018 that it voted against nearly 450 directors at about 140 companies as part of a concerted effort to increase board diversity.
This prompted companies to open up dialogues with CalPERS about the composition of their boards, according to the agency. For instance, biopharmaceutical manufacturer Arrowhead Pharmaceuticals Inc. indicated it was ramping up its efforts to include a broader range of candidates in future searches for directors after speaking with “California-based public pension funds.”
Likewise, New York State Comptroller Thomas P. DiNapoli announced in 2018 that the New York State Common Retirement Fund, another large pension plan with nearly $210 billion in assets, would vote against all directors up for re-election at companies that did not have a woman on their boards. At the time of the announcement, DiNapoli also revealed that the fund had come to agreements with four Fortune 500 companies to make racial and gender diversity part of their formal considerations for board members. They included New York-based pharmaceutical company Bristol-Meyers Squibb.
Diversify or Die
Research on investor proxy voting behavior indicates support is growing for governance proposals related to social matters on the whole. In fact, a mounting body of evidence suggests diversity is a performance issue for companies, not just an issue of optics. Further, companies going through the IPO process are wrestling with board gender composition requirements as they move into the public sphere – and as our recent Intelligize report indicates, the transition is not always a smooth one.
The pressure being applied by institutional investors on board diversity may inspire some soul searching within public companies lagging in the area — and deservedly so. A company that has failed to make a serious effort to diversify its leadership and workforce should consider the long-term ramifications for its corporate culture and contemplate what its inaction says about the company’s ability to adapt to change. “There is ample research that board diversity benefits companies,” DiNapoli said at the time of the New York State Common Retirement Fund’s announcement in 2018. Companies closing their eyes to that fact, or betting the diversity mandate will fade away, are likely in for a rude awakening.