KATHERINE MITCHELL—Wall Street has hardly been known to foster societal heroes. However, a few of these titans of trade may be attempting to amend that image.
On January 12th, in his annual letter to the chief executives of companies in which his firm invests, BlackRock CEO Larry Fink called upon the corporate world in a demand for change. In order to continue receiving money from BlackRock—the world’s largest investment firm retaining about $6.3 trillion in assets—Fink pressed CEOs to incorporate a “social purpose” into their business practices by showing “how [their companies] make a positive contribution to society.”
In pertinent part, Fink’s letter highlights that as a result of government failure in numerous sectors, including issues ranging from retirement to infrastructure to climate change, “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.” BlackRock, which is often the biggest holder of numerous publicly owned companies, is “trying to raise the profile of governance issues.” In sum, Fink may have subtly given these CEOs an ultimatum—contribute to society or lose our investment.
This phenomenon of corporate social responsibility, though not new, has proliferated in the wake of the tragic Marjory Stoneman Douglas High School shooting, which has sparked a paroxysm of activism calling for sweeping reforms on gun control across the nation. Amid boycott threats and national outcry, popular brands with ties to the National Rifle Association have felt increased pressure to enact their own policies to enforce such social values. Dick’s Sporting Goods, Walmart, and Kroger—some of the largest Fortune 500 companies in the country—have enacted new firearm policies that include provisions raising the minimum age for purchase and refusing to sell assault-style rifles. Other companies, such as Delta, United Airlines, Hertz, Enterprise, and MetLife insurance company, no longer offer their long-standing discount programs to NRA members.
Even more heartening to the millions of Americans calling for gun reform, some of the nation’s largest banks and payment processors have joined the conversation. In March, Citigroup Inc., the nation’s fourth-largest bank, rebuked the sale of large capacity firearms and ammunition, and announced a plan to prohibit its business partners from selling firearms to customers who have not passed a background check or who are younger than 21 years old. The plan also includes a ban against the sale of bump stocks and high-capacity magazines. Citigroup’s new policies would apply to clients who offer credit cards backed by the corporation, borrow money, use banking services, or raise capital through the company. As of April 10th, Bank of America Corp., the nation’s second-largest bank, has announced its intention to cease financing companies that manufacture assault-style guns for non-military purposes. The bank will further refuse to underwrite securities issued by these manufacturers.
However, these unprecedented moves by corporate America to steer public policy are not without legal implications.
Altruism and Profit: A Recipe for Litigation
Larry Fink would not be the first officer of a largely held public corporation to attempt to intertwine altruism and profit. In the benchmark case of Dodge v. Ford Motor Co., Henry Ford, the head of Ford Motor Co., was sued by plaintiff shareholders for admittedly selling cars at a price that negatively impacted short-term profits. Ford defended this decision philanthropically, contending that the company should aim to spread the benefits of an affordable industrialized society with as many people as possible. The court highlighted that the purpose of a corporation is to garner profits for its shareholders and that, as a director, Henry Ford was obligated to make such decisions in the best interests of the shareholders and not the public as a whole. However, the court emphasized that it would not interfere with decisions that come under the purview of the business judgment of directors.
How does this play out in modern corporate governance? The Ford case is a classic example of a corporate director putting public policy before profits—a strategy Larry Fink should be wary of should BlackRock start to disinvest in companies based on altruistic decision-making. To be clear, as an investor, Mr. Fink has broad discretion in decisions regarding the allocation of assets; however, as a director, Mr. Fink’s discretion is limited by his fiduciary duties to BlackRock’s shareholders.
Although shareholders of a corporation are generally not entitled to question, through litigation, the business judgment of its directors, they are entitled to bring suit should they feel these directors are in breach of their fiduciary obligations. One such breach could arguably arise if and when a corporation’s directors begin to entrench themselves—and shareholders’ money—into public policy warzones arbitrarily or with destructive market outcomes for the corporation’s profits. However, if these corporations can frame their investment choices with shareholder profitability in mind, they may find themselves in the wiggle room of the business judgment rule—a win for both profits and public policy.