The Fink doctrine

The Times reports that Larry Fink, the CEO of BlackRock, has sent a letter to the CEOs of the public corporations that BlackRock owns stakes in (which is to say, all large corporations). The letter argues that corporations must take seriously their responsibility to society:

Society is demanding that companies, both public and private, serve a social purpose. 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.

Acolytes of Milton Friedman will squirm. The “Friedman doctrine” says that corporations should maximize profits, and no more. Let shareholders (who earn high returns as a result) and consumers (who pay low prices) decide how to use their savings to benefit society, directly or through government.

Friedman makes the good point that if we agree that business leaders should spend corporate funds on public benefits, then we’ll also have to accept them as agents of the public trust, yet there is no reason to believe that CEOs are capable of determining the best social uses for a corporation’s funds. Do you want the CEO of Exxon or Coca-Cola to use dollars that would otherwise go into lowering the prices of their products to fund the latest climate-denial institute or an art museum in a wealthy community? Or would you rather use those dollars for your own charitable interests?

Fink seems to be aware of these objections, and in fact toward the end of the letter, after suggesting that BlackRock’s vassals need to serve a “social purpose,” he defines that the “social purpose” for BlackRock as “investing the time and resources necessary to foster long-term value.” And this just means that BlackRock will continue, as it always has, trying to discourage corporations from maximizing short-term returns, and seems to have very little with the sort of corporate charity that Friedman attacked. Which is to say that BlackRock isn’t doing anything different except, according to the Times, adding staff to monitor the companies that BlackRock owns stakes in (something BlackRock and the other institutional investors have been doing for years, even while sometimes claiming in response to complaints about the antitrust implications of their behavior that they have no influence on corporate governance because they are “passive”).

If BlackRock wants to act in a socially responsible way, here is something it could do. It could demand that CEOs of the underlying firms be compensated based on the difference between the stock returns of their firm and the stock returns of other firms in the industry. This would give CEOs an incentive to cut costs so as to increase market share, passing on savings to consumers. The increase in competition would also reduce the aggregate returns of the firms within the industry since they typically enjoy market power, thanks to the oligopolistic structure of most industries and the firms’ common ownership by a handful of institutional investors like BlackRock itself. That means that BlackRock itself would lose money both for its shareholders and clients, including the relatively small portion of the population that has invested its savings in stocks. But the losses would be offset by gains to consumers. That would be good for society, but bad for BlackRock. Is Fink willing to put his (actually, our) money where his mouth is?