Larry Fink at BlackRock: Bridging Purpose and Profit | Cold Call

0:00Larry Fink:Hey Chicago, class it up with Crocs. You know back to school is coming in fast. So why wait to find your new fave footwear? Step into a local Crocs store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up, it shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest Crocs store today. Propel Fitness Water with Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade electrolytes.

0:46Larry Fink:On October 13, 1972, the CEOs of General Electric, U.S. Steel, and Alcoa announced the establishment of the Business Roundtable, a group comprised entirely of CEOs of large corporations whose purpose was to promote a thriving U.S. economy and expanded opportunities for all Americans through sound public policies. It was pretty clear from the get-go that those policies would, by and large, support the interests of business. The Roundtable became a powerful lobbying group on Capitol Hill, thwarting antitrust and consumer protection legislation and blocking labor reform all within its first five years.

1:23Larry Fink:In subsequent decades, they worked behind the scenes in Washington to promote corporate tax cuts and free trade, while scuttling legislation that would have made corporate boards more accountable. So with that record, it's not surprising that the Business Roundtable Pledge of 2019 was met with some skepticism. The pledge was signed by 181 CEOs who committed to lead their companies for the benefit of all stakeholders, including customers, employees, suppliers, communities, and shareholders. It was a clear rebuke of the shareholder primacy that dominated business for decades, and it seemed to herald a new day for the role of business in society.

1:59Larry Fink:But many suspected we might soon return to business as usual. Today on Cold Call, we've invited Professor George Serafim to discuss his case entitled BlackRock, Linking Purpose to Profit. I'm your host, Brian Kenney, and you're listening to Cold Call on the HBR Presents Network. George Serafim's research focuses on measuring, driving, and communicating corporate performance and social impact. And he is the author of a new book called Purpose and Profit, How Business Can Lift Up the World. That is a very ambitious title, George. Thank you for joining me today. Thank you for having me, Brian. We like ambitious things here at HPS.

2:36Larry Fink:We're going to talk more about your book and the ideas in it. When I asked you to be on the show, I said, tell me about a case that will help to surface some of the ideas in your book, and you immediately gravitated to this one. So I thought it was a really interesting case. We read so often in the headlines about the misdeeds of people in business, and I think this case raises a lot of those questions to the surface about can business really balance profit and purpose in a meaningful way. Let's just dive right in. Why don't we start with the central theme of the case and what your cold call will be when you have this case in class.

3:09The central theme of the case, Brian, is the letter from Larry Fink, the CEO and founder of BlackRock, to corporate leaders, CEOs of the largest publicly listed companies, asking them about purpose and the connection of purpose to profit. what is their purpose to articulate that, establish governance mechanisms around that, so what are the implications for the board of directors, and set clear strategic direction in the future and a long-term perspective for achieving that purpose. My cold call is actually I put the students in the shoes of a CEO that is receiving one of those letters, and I say, you have three choices.

3:53You get this letter. Does this make you excited? anxious, or frustrated. Yeah, you're a little ticked off by this letter. So how are you feeling about that? It's very interesting. You get a cross-section of responses in the classroom. Some students say, I'm very excited because actually that reinforces how I would run the business with a strong sense of purpose that actually brings closer to us customers, motivates employees, and so forth. Some students say, it's actually frustrating because it's not clear what I'm supposed to be doing with this thing, right? So this concept of purpose is a fuzzy concept and so forth.

4:36And a third set of students that say, I'm a little anxious because it's not clear what I should be doing. And if I'm not...

4:46Larry Fink:Hey, Chicago, class it up with Crocs. You know back to school is coming in fast. So why wait to find your new Fave footwear? Step into a local croc store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest croc store today. Propel Fitness Water. With Gatorade electrolytes, zero sugar, and vitamins, Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade Electrolytes.

5:29Doing that, that does mean that my largest investor will vote against my board in the next annual general meeting. So it's a mix of feelings in the classroom and it really generates a great discussion.

5:42Larry Fink:Yeah, I have no doubt about that. For our listeners who aren't familiar with BlackRock, can you just describe what they do and what Larry's role is within the firm? Definitely. If you think about the investment landscape, BlackRock is the largest asset management house in the world. It became the largest, basically, asset management house in the world by concentrating on what is called passive investment product. So most of their products are really tracking indices, widely diversified set of stocks or bonds, tracking those indices passively. As a result, they charge very low fees for those products, and they have been exceptionally good at scaling up those products and attracting hundreds of billions and trillions, in fact, of assets under management.

6:34So it has become a very, very successful investor because of, in general, the massive, I would say, inflows of money towards passively tracked indices and fund products. And Larry's role within the firm, he's the CEO. He's the CEO and the founder. He has been the leader. He has led the organization. And in general, BlackRock has been an exceptionally, I would say, successful firm, if you look at their own stock price performance.

7:02Larry Fink:The advice that he's giving in these letters is not financial advice. It's not operational advice. It's not necessarily what you might think you would get from your largest investor about how to run your business better, necessarily, right? What are some of the things that he's saying and why might it make people anxious or a little confused? So he started actually writing letters to the CEOs, if I remember correctly, around 2014, 2015. I think something that he was always worried about is this idea of managing the business for the long term and not actually cutting corners in order to produce increased short-term performance, but at the detriment of long-term competitiveness.

7:44And then he goes on to actually describe this idea that when you actually have a strong sense of purpose inside the organization, that North Star might be quite effective at making sure that you stay on the long-term track of where the business needs to be and not be distracted by short-term noise, effectively, right? That might be coming from different developments that might be going on. So he's actually articulating why that sense of purpose is important and that this idea of purpose can be the animating force inside the organization that unleashes innovation, creativity and productivity inside the organization.

8:30Then thinking about that in connection to societal impact. Right. So how are you actually impacting the external environment around you? your customers, your employees, the natural environment, and so forth.

8:43Larry Fink:Yeah. So he's telling them to think about it. He's not saying, here's how you do it. He's not giving them a blueprint for how to do it. So that part is ambiguous or left up to the... And that is the frustrating part for some people, right? It's kind of like it's not clear exactly what you do. Yeah. So how did people react to it? Were their CEOs sort of welcome this, or what was the reaction he got from the CEOs? As the students would react to it. some people were excited, some people were frustrated, some people were anxious, because it has real implications, actually, from a corporate governance perspective, right?

9:15This is also the balancing act that one would need to have, right? So you're not telling people exactly what to do, but you're saying, well, you should explore this idea, and at the very least, you should release information.

9:35Larry Fink:is coming in fast. So why wait to find your new fave footwear? Step into a local Crocs store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits handled. Walk out ready for whatever's next. Visit your nearest Crocs store today. Propel Fitness Water with Gatorade electrolytes, zero sugar, and vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade Electrolytes. About how you're thinking about all of those issues, how you're managing human capital, social capital, intellectual capital, natural capital.

10:24All these forms of capital that increasingly have become really, really important for the competitiveness of organizations.

10:32Larry Fink:It's in the air, right? I mean, this notion of the role of business in society. How should business be thinking about what they can do to solve big, complicated problems? We talk about it a lot at Harvard Business School. Larry is sort of tapping into this theme, kind of like the Business Roundtable did that I mentioned in the introduction. I mean, do you see this as a movement that has really gained enough momentum to sort of sustain itself? And how do you think CEOs are going to react to that? I think it has. But I would put one caveat to that, Brian, which is we need to build accountability structures around that.

11:06Right. So it's one thing to say that I want to do this. I want, for example, to reduce carbon emissions in my supply chain or I want to become a more inclusive workplace. I want to improve employee workplace practices and safety or whatever that might be. And it's another thing achieving that. And I think we have a lot of commitments and aspirations, and we have much less accountability about the outcomes that we're actually achieving. So I think we're still in the process of creating that. But to the extent that we will be effective at creating that, almost like accounting revolution, I would say, around accountability of corporate impacts, I think that can become a much more powerful, sustaining effort.

11:51Larry Fink:I want to talk about the Goldilocks dilemma, which is a term that you use in the case. Can you describe what that is and how it relates back to the Larry Fink letters? You know, that goes back to the business model of BlackRock that we discussed. If you think about it, you can have active funds. You're actively saying, I want to buy that stock or I don't want to buy that stock. And in those types of funds, you have always the opportunity of exit. You say, I don't like this company. I want to invest in it. Now, if you are actually managing an index fund, you don't have this option. You actually need to hold the stock.

12:28Over time, as BlackRock was increasing its passive business, led to the realization that we need to actually have the capabilities to engage with companies and the leadership of those companies. Because we just don't have the option of exit. As a result, we need to build the capabilities for voice. And that led to the creation of an increasing number of resources and teams around what is called investment stewardship and asset stewardship. The Goldilocks dilemma is what do the leaders of the investment stewardship function need to do? Should they be more aggressive, engaging with companies? And that can come at the expense of damaging relationships with management teams that you will be invested for a very long time and so forth.

13:16but also at the expense of your cost structure. The more engaged you are, the more you need to hire people, build cost structures. But that goes a little bit against the business model that we discussed before, which is you have passive funds, you charge very, very low fees. And part of that is retaining a lean cost structure. On the other side, you're under so much pressure to become more engaged and really understand what's happening in those businesses.

13:43Larry Fink:Right. And the case talks about activist investors. We've heard about activist investors. They are a disruptive force within industries, but that's kind of their purpose, right? Yes. I mean, that's what they are built to be. That is a very different business model. Activist investors, in general, they charge much higher fees. At the same time, they have much more concentrated portfolios, meaning that they invest in a few firms, maybe eight to 10 companies, maybe even less in some cases. while a typical BlackRock fund might be...

14:41Larry Fink:nearest croc store today propel fitness water with gatorade electrolytes zero sugar and vitamins propel hydrates better than water to help you get the most out of your workout and get back to your best self what propels you propel with gatorade electrolytes the s p 500 fund yeah which is like 500 companies so very different business model much deeper into the fundamentals of the companies and you come up with an idea on how to improve the company. So you acquire a big stake in the company and then you engage with management and say, you need to divest this operation, you need to change this business unit, you need to repurchase shares, whatever that might be.

15:24Very different business model.

15:26Larry Fink:Sounds like a nightmare scenario for most CEOs. You know, sometimes I would say it can be distracting, but sometimes there are very good and valid points in many of those activist campaigns. because in some cases, companies have been a little bit sleepwalking. They are a little bit too comfortable. And sometimes shaking the boat is a good thing as well. So as in everything in life, you can find good activist cases, bad activist cases. Right, right. Yeah, and I would imagine we know that over time, workplace cultures develop in such a way that sometimes nobody wants to give bad news to the boss.

16:01Larry Fink:And an activist investor doesn't worry about that, right? Exactly. How does a company like BlackRock interact? interact? Like what's their relationship with an activist investor? It's a really interesting question. So in many cases, companies like BlackRock, they are not activists in the sense that they're actually trying to force a shareholder proposal, let's say, in an annual general meeting to change the board of directors or something like that. But actually they will vote during the annual general meeting on such proposals. So from that perspective, if you're an activist, gaining the support of an organization like BlackRock, understanding why you're making those requests and then gaining their support and as a result, some of their votes and so forth can be actually very, very important.

16:48Larry Fink:You've been on the show a couple of times before, and I think in each instance, we've talked about ESG quite a bit. That's something that you study deeply and that is a theme that recurs in a lot of your cases. It does come up in this case, too. And I'm wondering, for people who don't know what ESG is, maybe you can explain that just briefly, but also talk about it in the context of BlackRock, in the context of how asset managers think about ESG when they're making investment decisions. Yeah. Brian, ESG has become such a, I would say, buzzword. Yeah. But also it has become, unfortunately, politicized.

17:21And there is a lot of misconception around it as well. And I think it's really important to first define what it means for you. So for me, what it means is really about how the world around us is changing. And some of those societally relevant issues are becoming business relevant issues. And then what are the new risks and opportunities that organizations are facing? And is this a framework for understanding those risks and opportunities and then measuring impact, analyzing those impacts, and then driving performance on improving performance on those impacts and being able to communicate them all with an eye towards competitiveness?

18:01I think part of the BlackRock discussion as well is why is BlackRock doing this? And that is generating a great discussion in the classroom about if you actually think about it and you're a long-term investor, again, because most of your funds are passive funds, you will be investing in those companies for a long time, then you actually care about drivers of long-term competitiveness. competitiveness. So how you're managing your people, how you're impacting the natural environment around you, how you're creating trust with your customers, all of those things are actually important elements of a strategic plan and this long-term orientation of understanding where the organization is going.

18:42On the other side of things, though, you need to be careful because a classic problem that you might be facing is that you might have a management team that might say, tomorrow, tomorrow, we'll be better tomorrow. Three years from now, five years from now. And actually, the performance...

19:00Larry Fink:Hey, Chicago, class it up with Crocs. You know back to school is coming in fast. So why wait to find your new fave footwear? Step into a local Crocs store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled Walk out ready for whatever's next Visit your nearest Croc store today Propel fitness water With Gatorade electrolytes, zero sugar and vitamins Propel hydrates better than water To help you get the most out of your workout And get back to your best self What propels you? Propel with Gatorade electrolytes In the short term and medium term Might be deteriorating And they might be using that as an excuse for what is going to happen in the long term.

19:52So it's all about this balancing act when you're trying to keep one eye on the microscope while keeping the other eye on the telescope, if you will.

20:03Larry Fink:Yeah, and I think we've always said that ESG is good for business. You don't do it for altruistic reasons. It's not about altruism. And people talk about greenwashing, and those terms come up quite a bit. But what you're saying, it sounds like, is that companies who invest in these areas and think about them strategically perform better over the long run. Yeah. I mean, if you think about it strategically, right? And that is always, I think ESG, as any other management concept, I would say you can do it bad or you can do it wrong, right? And I think you will find that some management teams are probably destroying value through ESG and some management teams are creating value through ESG.

20:40If you take a step back and you say, well, how can I actually understand the fact that I'm using different types of resources and then the outcomes that I'm generating from the use of different types of resources and how that is feeding into my competitiveness.

20:56Larry Fink:Yeah. Where the world is going, where markets are going, and what do people want actually. I'm wondering if there are leaders of other firms, other asset management firms, who have taken an approach similar to what Larry's done. Well, it has actually become part of the competitive field, Brian, which is actually quite interesting. What started from a niche part of the asset management market over time has become, I would say, pretty standard in the asset management space so that everybody is actually having an ESG strategy. Everybody is having an ESG policy. Everybody is having ESG disclosures.

21:32Now, the question is how good those are. Well, there you will find a lot of differentiation, right? Some investors are actually viewing ESG really as a compliance exercise, while other people are viewing actually ESG as an innovation exercise. Again, trying to understand how they can collect new forms of data that allow them to have a better informed opinion about management quality and business model quality. Yeah.

22:01Larry Fink:I usually ask in the beginning of the conversation, and I didn't today, but I want to circle back to it now with your book in mind. I always ask why faculty choose to write a particular case, what sparked their interest in it, how does it relate to the scholarship that they think about. And in this case, I would ask you that, but also say, how does this relate? Why was this the perfect case to surface the ideas in your book? Because the Goldilocks dilemma, Brian, is something that is chasing all of us in pretty much everything that we do in business and really in our lives. Anytime that you're doing something new, the question is, am I doing just the right amount?