The Faux Debate Between Stakeholders and Shareholders

BlackRock CEO Larry Fink’s open letter to CEOs has reignited the “shareholders versus stakeholders” debate. Bill George says it’s actually not much of a debate: mission-driven, values-centered companies perform better.

BlackRock CEO Larry Fink’s recent letter to all CEOs in the S&P 500 has reignited the never-ending debate of “shareholders versus stakeholders.” Titled “A Sense of Purpose,” Fink’s letter is both inspiring and blunt. It does not pull its punches as Fink tells CEOs that their companies must serve a social purpose.

“Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote. “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.”

This position sharply contrasts to Nobel Prize-winning economist Milton Friedman’s famous 1970 article, The Social Responsibility of Business is to Increase its Profits. Friedman argued that businessmen who “take seriously their responsibilities for providing employment, eliminating discrimination, avoiding pollution or whatever else. . . are preaching pure and unadulterated socialism.”

Does this make Larry Fink a socialist? Hardly. In fact, Fink is one of the world’s great capitalists. He cofounded BlackRock in 1988 and has grown it into the world’s largest money manager with more than $6 trillion in assets under management. Yet many other fund managers, private equity executives, and activist investors believe Fink’s push toward the stakeholder model will sacrifice their returns. They believe that companies must select among binary options of serving shareholders or serving society.

This is a wrong-headed idea because companies with clarity about their purpose actually perform better in the long run. When they do so, they transcend this binary choice and achieve both results. What’s missing in this debate is a deeper understanding of how value is created, and how it benefits all stakeholders in society—especially shareholders.

“DOES THIS MAKE LARRY FINK A SOCIALIST? HARDLY. IN FACT, FINK IS ONE OF THE WORLD’S GREAT CAPITALISTS”

Let’s focus on how shareholder value is created. Every company should start with a clear purpose and set of values that go beyond making money. It is the purpose and values that motivate and unify employees worldwide, not merely a company’s financial goals. Most employees know they will never be wealthy, but they want to make a difference through their work. If they can align their personal purpose with the company’s purpose, there is a congruence that inspires them to do superior work, create great products and innovations, achieve the highest quality, and provide customers with superior service.

It is through innovations and superior service that companies create customer satisfaction and loyalty. That, in turn, leads to increased revenues and ultimately greater profitability—the basis for creating ongoing shareholder value. The key to sustaining this formula is the companies’ willingness to reinvest significant portions of its profits in the business—through research and development, market expansion, capital expenditures, and most importantly (and often forgotten) development of talented people and leaders.

This virtuous circle creates value for all stakeholders of the enterprise, including its shareholders and owners. I first presented this concept (see chart below) at the Academy of Management in August 2001, shortly after I concluded my ten years as CEO of Medtronic. It is as valid today as it was then.

This is the rigorous approach we followed at Medtronic as the company’s market capitalization rose from $400 million in 1985 to $60 billion by 2000. Today, thanks to the revival of long-term investments under CEO Omar Ishrak, Medtronic’s shareholder value has risen to $110 billion.

The challenge to the virtuous circle comes when companies are faced with economic declines or business difficulties due to technology and market changes. Will they continue to invest, or do they cut back on the very things that have made them successful in good times? That’s the real test of leadership—whether it has a long-term view or strictly a short-term mentality. This does not argue against cost-cutting; in fact, cutting infrastructure, supply chain costs, and excess expenses should be done all the time, in good times and bad.

This is the approach used by ExxonMobil as it has been one of the greatest value creators in the last 100 years. Even as the price of oil drops significantly as it has in the last three years, Exxon continues to invest heavily in capital expenditures around the world to discover and produce more oil and natural gas, yet it is continuously cutting its internal costs to be more efficient.

Once companies fall prey to cutting long-term investments instead of building for the future, they are headed into the well-worn trap that has engulfed General Electric, just as it did formerly great companies like Sears Roebuck, General Motors (pre-bankruptcy), Motorola, Kodak, and many more. Cost-cutting actions may please short-term shareholders, but they never create sustainable increases in shareholder value.

In his letter Fink describes this phenomenon very accurately, “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. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth.”

The great long-term value creators of the past 25 years all follow this approach. Examples include Apple, Alphabet/Google, Microsoft, Amazon, Facebook, Berkshire Hathaway, Johnson & Johnson, Exxon and Walmart as well as China’s Tencent and Alibaba—currently, the most valuable public companies in the world.

There should be no debate between the stakeholder value model and the advocates of creating shareholder value. Shareholder value is the result of having a clear mission and set of values that motivate employees to serve customers. Companies that start with the mantra of “maximizing shareholder value” ultimately destroy the very shareholder value that they are trying to create because they refuse to make the long-term investments required to create sustainable shareholder value.

Corporate leaders would be well advised to follow Fink’s thoughtful counsel. He isn’t just speaking for BlackRock but for all the long-term investors who depend on their leaders to sustain shareholder value for many years to come.