With environmental, social and governance issues -- including an increased focus on human capital metrics -- garnering significant attention from pension funds on top of an effort to create standardize reporting, the CEOs of major institutional investors State Street Global Advisorsand BlackRock released their 2019 proxy season letters with BlackRock continuing its push for “purpose and profit” while State Street announcing a specific focus for 2019 on “on corporate culture as one of the many, growing intangible value drivers that affect a company’s ability to execute its long-term strategy.”
Recently, there has been a marked shift away from traditional shareholder value maximization themes in the annual proxy letters issued by the major institutional funds. State Street acknowledges the shift, noting “in recent years [State Street’s focus] has been on good governance and other practices that affect a company’s ability to generate positive returns for investors over the long run.” These “other practices” “span a variety of environmental, social and governance (ESG) topics material to sustainable performance” according to the letter.
Profits are in no way inconsistent with purpose – in fact profits and purpose are inextricably linked” according to Blackrock CEO Larry Fink, who discusses a wide range of social issues, including general civic unrest, environmental concerns, and inequality. Unsurprisingly, Fink’s focus on every company creating a guiding corporate purpose is fundamental to navigating these worldwide issues and emphasizes as issues a company's long-term value creation strategy, talent recruitment and retention, and retirement security, Notably, Fink also cites the views of Millennials, who as a group value improving society much more than generating profit.
Corporate culture – the intangible value driver: State Street cites an EY study which found intangible corporate assets, like corporate culture, can amount to up to 90% of an organization’s market value today, State Street states that corporate culture and other intangibles are “driving a greater share of corporate value”. The specific value of corporate culture, according to State Street, is that it allows companies to navigate the “unprecedented business disruptions” presented today. Notably, State Street acknowledges that corporate culture, as a metric, is “difficult to measure and manage”.
Boards have a responsibility to align culture and strategy: State Street notes that flawed culture has resulted in several “high profile cases of risk-taking or unethical behaviors that negatively impact long-term performance” and places the responsibility on the company’s board through a framework for assessing and monitoring corporate culture which is an appendix to the letter. The framework asks the board to examine whether strategy and culture are aligned, implement mechanism to assess culture, and improve reporting to assist in monitoring. In its separate responsible investment principles, BlackRock also notes how 2019 engagements will focus on speaking to companies about corporate purpose and how it aligns with culture and corporate strategy.
Emphasis on human capital, non-financials is growing: Major institutional players like BlackRock and State Street clearly are advocating for enhanced attention on ESG, human capital, and other “intangible” assets. The real question will be how things move forward if the funds do not think enough has been done on the topic. This week, Norges bank announced a decision to “exclude” two companies from the government pension fund global for “serious or systematic human rights violations”. Obviously, there is a big difference between this type of charge and being viewed as having a poor corporate culture, but it is still an example of one of the largest sovereign wealth funds seeking accountability.