San Antonio Express-News (Sunday)
Superuser of shareholder democracy takes an undemocratic approach
Billionaire Larry Fink founded BlackRock — with an estimated $10 trillion under management, it’s the world’s largest asset manager — and has emerged over the past four years as the embodiment of a set of debates about capitalism. His self-appointed role is both important and controversial.
We should understand what he says he is trying to do, what he is capable of doing, and the problems that arise from the extraordinary concentration of power in one man’s hands.
Fink was already a titan of Wall Street 20 years ago when I was working as a mortgage bond salesman. In the 1980s he had been a key architect of the mortgage market with First Boston, then founded BlackRock in 1988. His firm grew steadily, then expanded massively as a big player in the resolution of failed companies like Bear Stearns and AIG after the 2008 subprime mortgage crisis. And BlackRock’s assets under management ballooned when it acquired the ETF and index fund business from Barclays.
Now, because of its outsize role as an index-fund manager, BlackRock wields an unusual amount of power over the levers of capitalism. It is typically either the largest or second-largest shareholder (usually with fellow
index-fund giant Vanguard) in big U.S. public companies.
In theory, shareholders of public companies can vote on decisions that influence the corporate board. And boards hire and fire the CEO. In practice, such “shareholder democracy” is rarely that straightforward. But it’s worth noting the company Fink runs is the largest owner of shares in the largest companies in the country. It’s quite a perch of power.
All of that is background to his transition from successful Wall Street CEO to philosopher king in 2018.
‘Benefit all’
That year, Fink wrote a letter addressed to the CEOs of the S&P 500 firms, the largest public companies in the country. His big idea: They needed to expand their responsibility beyond pure profits for shareholders. “Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate,” he wrote. Stakeholder capitalism, Fink has argued in each annual letter to CEOs since, measures success by much more than profits.
In 2019, he urged businesses to
make “a positive contribution to society.” In 2020, he leaned in to climate change, saying BlackRock would exit investments that “present a high sustainabilityrelated risk.”
In addressing his fellow captains of industry, Fink wants to clarify between what he advocates with “stakeholder capitalism” and what he is not doing.
“Stakeholder capitalism is not about politics,” he writes in his 2022 letter. “It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
Because of his unique role, if Fink pushes BlackRock to consider a wider range of issues than mere shareholder profit, he effects a revolution in capitalist shareholder governance.
For my part, I begin with an openness to “stakeholder capitalism” because it seems humane, nuanced and realistic. He’s right that capitalists need to be concerned with more than just profitability. Governance, social norms, ethical concerns and the environment all matter tremendously. Powerful corporate leaders in particular have an obligation to seek out a balance of interests in a modern-day version of the biblical passage from Luke 12:48: “To whom much is given, much will be required.”
Not all agree
I do not embrace the alternative view that capitalists should stick to a narrower, more traditional set of goals. The late economist Milton Friedman argued for limiting the purview of a company to maximizing profits and profits alone, and letting the rest sort itself out.
But not everyone is happy with Fink and his philosophy. Criticisms range from cynicism to hostility. Ultimately, I remain open to and glad for the critics because I’m a skeptic of all billionaire philosopher kings. I mistrust unchecked concentrations of power, however wellmeaning.
In practice, Fink’s stakeholder capitalism has most notably played out as BlackRock publicly
leaning in on climate change, the most prominent issue in ESG — environmental, social and governance — investing. Naturally, there are those who think firms are doing too little and those who think Fink is asking too much.
The toughest critic of his stakeholder capitalism came from inside his own house. Tariq Fancy, BlackRock’s former chief investment officer of sustainable investing, left the firm in disgust. A year ago he began speaking to the media about his frustrations. He wrote in an opinion piece in USA Today: “In truth, sustainable investing boils down to little more than marketing hype, PR
spin and disingenuous promises from the investment community. Existing mutual funds are cynically rebranded as ‘green’ — with no discernible change to the fund itself or its underlying strategies — simply for the sake of appearances and marketing purposes.”
This is the criticism from the side that supports the vision of stakeholder capitalism but that finds the implementation at BlackRock and other investment managers weak and hypocritical.
And then there’s the other side, pushing back on Fink’s call-outs to CEOs.
Real estate billionaire Sam Zell’s zinger about the stakeholder
approach: “I didn’t know Larry Fink had been made God.”
Billionaire Warren Buffett chimed in: “I don’t believe in imposing my political opinions on the activities of our businesses.”
‘New bunch of emperors’
Billionaire Charlie Munger — Buffett’s right-hand man — complained in February about Fink’s potential power to vote index shares to enact political views.
“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Munger told the Wall Street Journal. “I think the
world of Larry Fink, but I’m not sure I want him to be my emperor.”
This is “Clash of the Titans” stuff, these debates among the billionaire class. But they also are articulating authentic differing sides of the debate on capitalism.
On balance, I do think we can do better than chasing pure profits. I’m glad Fink has made a few of his fellow billionaires uncomfortable. But we should all be just as uncomfortable about the undemocratic way in which Fink can make consequential decisions that impact all of us.
The idea that someone should have this kind of extraordinary
concentrated power to decide what is best for all stakeholders in capitalism is … troubling? Dangerous? Scary? I keep returning to the fact our system is poorly equipped to defend itself from the kind of power wielded by our billionaire overlords, however well-intentioned they may be.