Korn Ferry

Be Good, Wall Street Now Demands

The concept of socially-responsible companies has been around for decades, but this week it got a $6 trillion Wall Street ally. Asset management giant BlackRock told the companies in which it invests that to prosper over time, “every company must not only deliver financial performance but also show how it makes a positive contribution to society.”

Wall Street has long been accused of short-termism and focusing only on profits, so having a mammoth icon of the industry embrace corporate responsibility as an investing metric could have ramifications for leaders worldwide. “BlackRock through its funds is one of the largest owners of U.S. companies in aggregate,” says Chad Astmann, co-head of asset management and alternative investments with Korn Ferry. “Coming out and saying this will force management teams to be more long-term focused and boards to be more stringent in making sure leaders adhere to plans that produce the desired financial and societal returns for shareholders.”

The new stance from Wall Street is still in a very early stage of course. But Astmann says the move could have a trickle downeffect as well, enhancing the voice of other firms pushing for corporate social responsibility and influencing how leaders are chosen and boards are structured. There would be talent implications as well, with leaders ultimately needing a workforce that includes individuals who can deliver more than just profits. And  firms would need to come up with metrics on their societal impact along with ways to measure how they are doing.

Corporate social responsibility is not new, of course—the idea dates back at least to the 80s, if not further. Korn Ferry's 2016 study, “People on a mission,” found that companies that focused their employees on the organization’s purpose boasted annual growth rates that were nearly triple the annual rate for the whole sector. And the benefits go beyond financial. The study also found that having an authentic purpose can help recruit and retain talent, win over customers, and have positive impacts on broader society.

Over the last few years, however, the idea has moved from an investment afterthought to a regular conversation between leaders, boards and stakeholders. Two reasons account for the change. There is currently a generational shift not only in the workforce, but also in the transfer of wealth, says Korn Ferry Senior Client Partner Rick Lash. With that shift has come a rise in expectations around the responsibilities organizations have to shareholders, with younger investors asking about an organization’s ethics, climate impact, and positions on social and cultural issues.

Another factor, Lash says, is the increasing push for transparency and accountability. Greater access to information, coupled with the efficiency of social media, means consumers can shine a spotlight on organizations engaging in bad management practices, treating their people unfairly, and behaving unethically. 

“For too long companies were only evaluated through a financial lens, but the expectations of the public and investors has evolved to apply other lenses around such things as the environment and community,” says Lash. 

It’s not the first time BlackRock has waded into activism. It recently has been pushing for increased diversity on corporate boards. For it’s part, the asset manager may not sell the stock of firms that cannot prove their societal benefits (many of BlackRock’s funds track various stock indexes). But the firm will use proxy votes—which sometimes include asking to replace board directors or other major executive changes—as a way to encourage social responsibility. 

Contributors

  • Chad Astmann

    Co-Head, Global Asset Management

    Bio >
  • Rick Lash

    Senior Client Partner

 

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