Investment Managers Must Ease Pressure on CEOs to Achieve Non-Financial Agenda

Last month BlackRock announced that it would temporarily halt its escalating efforts to encourage the companies it invests in to increasingly prioritize its environmental and social agenda, in consideration of the financial stress that the recent economic downturn has placed on most businesses. Interestingly, BlackRock referred to these efforts as “non-financial reporting projects” and wasn’t afraid to reiterate that the asset manager expects these efforts to resume in due course. 

It is not clear that BlackRock will, in fact, ease up on its non-financial agenda — just two weeks ago the money manager voted against management of a Finnish company on climate grounds. Nevertheless, the announcement begs a question: Why does the investment manager, which has over $7 trillion under management, feel entitled to put pressure on its companies to deprioritize profits when the economy is not tanking? 

In recent years BlackRock has become increasingly aggressive in advancing a socially progressive agenda, something it can do by threatening to withhold its proxy votes on key management proposals unless its demands are met. The threat is significant, given that its size makes it effectively the largest shareholder in most U.S. companies. If a company’s management fails to take sufficient steps to change the racial and gender mix of the boardroom or senior management, reduce its carbon footprint, or eschew actions that might abet the weapons industry in some way, it might face a problem getting its directors approved or else be confronted with a resolution that would force it to pay more attention to its non-financial agenda. 

There is always a cost to BlackRock’s efforts to pursue its social and political agenda into financial markets; the recent economic collapse has merely made that reality abundantly clear at this time. When companies have seen demand for their goods and services crater and their solvency is at stake it becomes difficult to ask a company to devote more resources it no longer has to combat climate change. 

But it should not take a company’s existential crisis to force management and the board of directors to focus intensely on a company’s performance to the exclusion of other, less tangible goals. Bloomberg News columnist Matt Levine likes to argue that it does not appear to take much persuasion for investment fund managers to agree to take into account factors besides their returns, because once the interests of other stakeholders must be considered, the pressure to achieve extraordinary returns for investors lessen significantly, replaced by things that can’t be measured all that easily. 

It can be especially pernicious for investors — like BlackRock — who have the bulk of their investment money in index funds. Since these preclude any notion or expectation of beating the market, the investment managers are free to pressure its companies to increasingly engage in economically unproductive (or worse) activities, since these will have zero impact on their relative performance. If their portfolio’s performance slips a percentage point or two it might be damaging for their investors’ retirement plans, but there would be no reason for them to move their funds to another index fund. 

It is also worth remembering that, despite activist rhetoric to the contrary, these political agendas inevitably serve to reduce shareholder returns in the long run. Pursuing social or environmental goals with the explicit acknowledgement that it will inevitably reduce their returns effectively amounts to a transfer of wealth away from investors whose money BlackRock holds — the majority of whom are far from rich — for the benefit of management and its partisans. This does not represent an equitable outcome by any means. 

Other efforts by BlackRock to demonstrate its fealty to the progressive agenda have proven to be somewhat uncomfortable when someone tried to hold them accountable. For instance, The Business Roundtable’s remarkable — and highly publicized — Statement of a Purpose of a Corporation, which stated that its members would henceforth no longer put profits ahead of other important stakeholder goals, has thus far not proven to be very durable or binding to its signatories

That vagueness was clearly the intent, given that BlackRock attempted to petition the SEC to exclude a shareholder proposal that would force it to consider how its management and governments should be changed in order to hew to the statement. Putting meat on the bones of a vague, platitudinous declaration that would impose a modicum of accountability for a new set of stakeholder goals is the last thing Larry Fink and BlackRock would like to occur.

I believe that the United States does need to do more to combat climate change, but the proper way to accomplish that would be for the federal government to impose a carbon tax. Having BlackRock bully companies into spending resources to reduce their own carbon footprint is not an especially productive way to accomplish such a thing. The implicit cost it imposes is borne by small investors who have no say and are almost completely unaware of the choices that their investment management company has made on their behalf.  


Ike Brannon is a former Treasury Department official and is currently a senior fellow at the Jack Kemp Foundation. 

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