How the investment management industry can contribute to a more positive society

“The public expectation of your company has never been greater” wrote Larry Fink, head of mega-investor BlackRock to CEOs of the companies his firm invests in.

In his annual missive he called on companies to deliver not just financial performance but also to demonstrate how they are contributing to a more positive society and delivering value to all stakeholders. With this, BlackRock is espousing a much wider definition of value than is commonly used in the industry.

Shareholder engagement has to change, says Fink. No more ad hoc conversations around executive pay – but meaningful dialogues focussed on long-term company performance.

When this message comes from a fund manager with close to ￡4 trillion in assets, it is guaranteed an audience. It hasn’t been an entirely supportive one, however. Plenty of commentators have criticised Fink’s pronouncement, particularly in the US where stakeholder value is a far less commonly accepted concept than it has become in Europe.

Others have said that with such a large – and growing – proportion of its funds invested passively, BlackRock has no place making this statement. Funds that are invested in the whole market are not able, by definition, to exclude companies and therefore this is an empty threat.

This misses the point though. It is precisely because BlackRock cannot sell shares in the millions of companies it owns, at least from its passive portfolios, that shareholder engagement is so important. Being actively involved investors, rather than absentee ones, is the only tool a passive investor has to help improve company performance.

BlackRock’s decision to devote greater resources to this function therefore makes huge amounts of sense.

But there is another important and largely overlooked question for fund managers today, and that relates to their own social utility. Fink’s message to companies could apply equally to his own business, itself a listed firm.

Expectations of the investment industry, whether those of customers, regulators and governments have, indeed, never been higher. Millennials have different needs and wants when it comes to their savings and it is far from clear that the fund management industry understands this. Institutional investors are also becoming much clearer about what they expect from their fund managers, and more outspoken when they don’t get it.

All this at a time when regulators are questioning costs and requiring greater levels of transparency from the industry, threatening its healthy margins.

To survive, fund managers need to understand societal trends and adapt accordingly, just as Fink recommends companies do. To prosper over the long-term, they must build genuine relationships with their clients and create products that deliver real value – in the broadest sense – to them.

That is how the investment management industry can contribute to a more positive society.