A Shift in Shareholder Activism Presents Reputation Challenges and Opportunities

By Maura McCarthy

On the 16th of January, 2018, Laurence D. Fink, the founder and chief executive of investment firm Blackrock sent a letter to some of the world’s largest companies. As one of the most influential investors worldwide, Fink’s simple but powerful message to global business leaders was: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

Beyond a grand-standing publicity statement, Fink stated that companies who did not serve a social purpose would lose Blackrock’s support, and that staff would even be added to help monitor how companies respond. As the largest investor in the world, with $6 trillion in investments, this statement is significant.

The tone of the letter, a draft of which was published in full in the New York Times, is informative, stirring and determined – positioned as a clear intention to break with the status quo of the investment world.

A call for purpose-driven profits

Fink’s call for purpose-driven profits is in stark contrast with the historical perception many have of the investment industry. Many companies that Blackrock invests in consider their only duty to be producing profits for their shareholders. Economist Milton Friedman wrote: “What does it mean to say that ‘business’ has responsibilities? Only people can have responsibilities.” Granted, that was 1970, but it’s still far from an extinct perspective today.

Ten days before Fink sent out his letter, Jana Partners, a New-York based activist hedge fund teamed up with the California State Teachers’ Retirement System, or CalSTRS, to send a letter of their own. Theirs was to Apple, demanding the tech company focus more on the potential negative effects its products have on children. To quote from the letter: “In the case of Apple, we believe the long-term health of its youngest customers and the health of society, our economy, and the company itself, are inextricably linked.”

Jana and CalSTRS together own $2 billion in Apple stock, so unsurprisingly the letter received a lot of attention after it was publicised by the Wall Street Journal. Jana and CalSTRS didn’t target Apple because the company doesn’t care about the effects its products have on children - Apple reportedly has better tools to manage the use of its products by children than many peer companies. But because of Apple’s reach and influence, the power it holds to exercise change in the wider tech industry is undeniable.

Corporate reputation hinges on both profit and purpose

 At first glance, these two recent examples of prominent shareholder activism appear driven by corporate aspiration to propel social good, and while this may be a part of it, both companies are more likely thinking of long-term bottom-line returns.

Despite Fink’s ask that companies benefit society, he by no means downplays the importance of profits. Rather, he outlines in his letter that having a social purpose is indistinguishably linked to a company’s ability to maintain its profits.

In the case of Jana and CalSTRS, they recommended to Apple that it form a special committee to oversee research on the effect of its products on young users and help develop new tools to control iPhone overusage. As for its motivations, as an activist hedge fund, Jana is doing this because it considers it the correct business decision for Apple. From the fund’s perspective, a proactive move on the matter could generate goodwill and keep consumers loyal to Apple brands, ultimately creating value for its shareholders in the long-term.

Society looks to the private sector to set example

High-profile shareholder activism aligns with the recent shift in perceptions around accountability for corporate social responsibility. Many governments are increasingly considered to be faltering in their duty to adequately prepare for the future. Concerns around unsustainable healthcare systems, insufficient retirement funds and irreparable environmental damage are reflected in global media headlines. As a result, society is calling out to the private sector to step in and respond to these broader societal challenges.

Society’s change in assigned accountability brings with it shifting stakeholder perceptions which companies must be aware of to protect and enhance their reputations. There has always been a social call-out of for businesses to halt or avoid operations that cause societal or environmental damage. But in the past a company’s response has usually been reactive; it quickly acted to avoid reduced profits and a damaged reputation, recognising the reciprocal relationship between the two.

What’s new in more recent times, however, is the expectation by stakeholders and society as a whole that businesses care for the world around them, they engage in dialogue with their constituents and provide impactful solutions where governments have neglected to do so. The recent joint announcement from Warren Buffett, Jeff Bezos and Jamie Dimon that their companies Berkshire Hathaway, Amazon and J.P. Morgan, respectively, are teaming up to launch a new healthcare company to tackle the rising cost of healthcare in the U.S. is a perfect example.

From reactive reputation guarding to proactive reputation enhancement: authenticity remains key

Responding to society’s calls is no longer about avoiding reputation damage, rather it is about seizing the opportunity to surpass stakeholder expectations and thereby enhance existing reputation.

Corporate instinct may be to respond reactively, to quickly tie the business to a popular social cause in the hopes of assuaging stakeholder outcry. Stakeholders, however, are quick to make a critical assessment of whether that purpose is authentic or not. It remains crucial, therefore, that every company stay true to its business objectives first and foremost, and proactively consider its wider social purpose based on those. Why? Because, as Fink puts it, “without a sense of purpose, no company, either public or private, can achieve its full potential.” Be that profit potential, social good potential or reputation potential.

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