A Voice of Reason: BlackRock’s Newest Letter Can Help Boards Navigate Difficult Shoals in 2022

By Alexandra R. Lajoux


Institutional Investors Shareholder Communication Online Article

In the middle of Homer’s epic poem The Odyssey, Odysseus heads home—but he has a problem: sea monsters. “We then sailed on up the narrow strait with wailing. For on one side lay Scylla and on the other … Charybdis,” Homer writes from the featured hero’s perspective.

The sailors must progress carefully because a turn too far to the right or left will mean certain death from either a six-headed beast or a whirlpool.

Today’s corporate leaders, faced with numerous dilemmas as they strive to create long-term corporate value, must feel a kinship with Odysseus. But leaders should not fear: good advice on how to navigate the difficult shoals of the modern era comes in the latest annual letter from Larry Fink, CEO of BlackRock, the world’s largest asset manager with more than $10 trillion in assets under management.

This most recent letter is the longest that Fink has ever written in the ten years that he has been reaching out to the CEOs of firms with shares held by BlackRock funds. Fink’s first CEO letter, which debuted in 2012 at under 500 words, simply introduced CEOs to BlackRock’s “value-focused” approach to corporate governance. Since then, Fink’s letters have grown in length and complexity. (For a review of past themes, see this summary from NACD senior vice president Friso van der Oord, who wrote about Fink’s letter last year.)

Fink’s 2022 letter, at more than 3,000 words, covers five main topics and related dilemmas: company purpose, human capital, financial capital, decarbonization, and participative proxy voting. In each area, Fink steers a middle course, discouraging CEOs and boards from either-or thinking, as exemplified by the following questions: What is our purpose? Should we focus entirely on short-term profitability, or should we heed concerns raised by all our stakeholders? What about talent drain? Should we invest heavily in technology, neglecting human capital, or should we put all available funds into our payroll? And what about funding? Should we try to generate as much capital as we can from operations, or should we max out on external financing? Regarding energy, should we embrace alternative fuels and cut all ties with fossil fuels, or should we stay with oil, coal, or gas as a necessary evil? At proxy time, should we ignore smaller shareholder complaints or bend our company’s goals to please the maximum number of owners? Of course, none of these extreme alternatives is correct; each could have monstrously bad consequences.

As for company purpose, Fink warns against a focus on either short-term profits or stakeholder appeasement. While he acknowledges that “the fair pursuit of profit is still what animates markets,” he also notes that only “long-term profitability is the measure by which markets will ultimately determine your company’s success.” Veering too far in the direction of all stakeholders also holds peril: “Political activists, or the media, may politicize things your company does,” he warns. “They may hijack your brand to advance their own agendas.” The middle course is holding company purpose as a “north star.” Stakeholders do not need CEOs to opine on every issue of the day, says Fink, “but they do need to know where we stand on the societal issues intrinsic to our companies’ long-term success.” 

Also eminently middle-of-the-road are Fink’s comments on energy. He announces that although BlackRock has a net-zero emissions goal, the investment firm will not divest all fossil fuels. Fink explains why: “The transition to net zero is already uneven with different parts of the global economy moving at different speeds. It will not happen overnight,” says Fink. He notes that traditional fossil fuels such as natural gas will play a key role both for power generation and heating in some parts of the world. In short, “We need to pass through shades of brown to shades of green.”  

This kind of middle-course, hopeful thinking is exactly the mindset that directors need to adopt in 2022 and beyond as they journey to the ultimate destination of long-term company value. Safe travels!

Alexandra R. Lajoux
Alexandra Reed Lajoux, Ph.D., M.B.A., is a founding principal of Capital Expert Services, LLC (CapEx). She serves NACD as chief knowledge officer emeritus.