Beyond the BlackRock CEO Letter: Why We Need Green Barbarians At the Gate
By Raz Godelnik, MS SDM Co-director
To what extent are CEOs worried about sustainability issues?
According to the latest PwC’s 21st CEO Survey, the answer in general is ‘to some extent.’ Climate change & environmental damage is #9 on the list of CEOs’ concerns globally. However, there is an interesting geographical divide: While CEOs in Western Europe, Asia Pacific and Latin America include it in their list of top ten threats, climate change & environmental damage is absent from the top ten lists of CEOs in the rest of the world.
‘Social Instability’ which reflects concerns regarding inequality, human rights, gender, minorities, and so on, the picture is very similar – low priority in general (11th place in the global list), but in some areas around the world, like Africa (#1!), Central & Eastern Europe (#7) or even North America (#8) CEOs are more worried about it.
But maybe, just maybe, the right question is not how much CEOs are concerned about this or that issue, but what do they actually do about it? After all, we already know that attitudes ≠ behavior as demonstrated by endless surveys showing how consumers want to support sustainable brands.
If the question was about what CEOs do rather what they are concerned about, the picture would be somewhat bleaker. One indication is a draft of a new UN report suggesting “we are ‘extremely unlikely’ to meet the Paris Agreement goal of keeping global warming below 1.5 degrees Celsius” due to lack of sufficient action so far. This notion is also reflected in the point BSR makes in its new report: “many companies continue to struggle to incorporate sustainability into their strategies, governance, and management structures.”
In the past I suggested the focus should be more on changing the environment in which companies operate, not the CEOs because when the environment does not prioritize sustainability, CEOs will not prioritize it (in most cases), no matter what. I still believe this is very much the case, which is why I found the conversation around the letter Larry Fink, Founder and CEO of BlackRock sent earlier this month to CEOs, so interesting. In his letter, entitled ‘ A Sense of Purpose’, Fink writes:
Indeed, the public expectations of your company have never been greater. 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. Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.
Wow. These are very strong words coming from the head of the world’s largest asset manager with about $6 trillion in assets under management. No wonder Andrew Ross Sorkin of the New York Times suggested “it may be a watershed moment on Wall Street, one that raises all sorts of questions about the very nature of capitalism,” and Yale management Professor Jeffrey Sonnenfeld is quoted in Sorkin’s article saying he’s seen “nothing like it.’’ Andrew Winston on HBR was also optimistic about the letter, although more cautious reminding the readers that these themes came up in prior annual letters Fink sent to CEOs and that in general, taking action, like BlackRock did in the case of supporting a shareholder resolution demanding ExxonMobil to disclose climate change risks, can be more impactful than just writing letters.
I would like to take it one step forward and suggest that if we want to see any meaningful change in CEOs’ attitudes and more importantly activities we do need progressive investors to act more like ‘barbarians at the gate.’ The reason is very simple – it seems like CEOs pay a lot more attention to investors who “amass large stakes in a company and, through brute force, push for changes in the company’s leadership and business practices.”
Here’s one example: P&G spent according to some estimates at least $35 million in a proxy fight against Nelson Peltz, who invested heavily in the company and wanted to have a seat on the company’s board of directors. This fight, which is considered to be the biggest and most expensive one in the history of the company was not just about a board seat, but about the company’s future: Peltz wanted to make some radical changes in the company to “regain lost market share,” while the company claimed it is doing just fine. Peltz eventually won in a very close race and received a seat at the board. Now his vision and agenda will be shaping now P&G’s future.
Here’s another example: Last June GE board replaced Jeff Immelt, the company’s CEO for 16 years with John Flannery. According to reportsImmelt was replaced due to pressure on the company from no other than Nelson Peltz. The main problem Peltz had with Immelt was the company’s lagging stock performance – “Peltz was after Immelt because he was “concerned about [GE] missing recent earnings targets,” Fox news reported last March. Fast forward to 2018 and Immelt is no longer around, Peltz’s investment company gets a board seat and the new CEO seems to be far more aligned with Peltz’ agenda.
These are just two examples, but you can find many more of activist investors that understand corporate leverage points and take advantage of corporate governance weaknesses to promote their own agenda. As Rana Foroohar explains in her book ‘Makers and Takers: The Rise of Finance and the Fall of American Business’: “it’s no accident that as the activists have become more and more active, buybacks and dividend payments have reached record levels.”
We now need another type of activist investors – ones that are willing to act aggressively, just like Carl Icahn, Bill Ackman, Nelson Peltz Daniel Loeb and other activist investors, but this time to promote strong sustainability agenda.
I leave it to smart investors like Fink to figure out how to do it, but it can make sense (even for a passive investor like BlackRock) to focus on board changes –just see the impact that adding one board member, who is one out of eleven had on P&G.
Letters offering a sustainable vision are important and can have some impact, but even if they represent so and so trillions of investment, they are just letters. I’d like to remind Fink and others the Carbon Disclosure Project (CDP), with its network of investors and purchasers, representing over $100 trillion that has done great work increasing business’ levels of environmental disclosure worldwide, but has not managed to move the needle, i.e. getting enough companies to comply with the Paris agreement goals or adopt the Sustainable Development Goals.
At the end of the day we need business to embrace exponential change, not incremental one and do it fast. If we want to this change to happen, we need to see more green barbarians at the gate acting fiercely to enact strong sustainability agenda, not just writing nice letters.