BlackRock CEO Laurence D. Fink sent a powerful missive to CEOs and boards of directors regarding the proper role of publicly traded companies in society — and he subsequently sparked an industry debate about what that really means. Mr. Fink's advocacy is much needed in corporate America, but I believe a more pressing need for reform exists within the asset management industry. Let's reform ourselves first before we look for the splinter in someone else's eye.
In his annual letter, Mr. 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." I wholeheartedly agree but I would go further: for no class of organization is this more imperative than for asset managers.
For some, public corporations' duty to shareholders can be summed up succinctly as: maximize profits. Shareholders invest in them with an expectation of a return on that investment and nothing more. Others, like Mr. Fink, believe corporations have a larger role to play in society. This will become increasingly obvious as more and more of the world's wealth concentrates in the hands of women and millennials. Research shows that both of these demographic groups care about purpose-driven missions, not only investment returns. These populations increasingly represent clients of the future.
Investing with societal purpose can be particularly difficult in the asset management industry where companies must serve both shareholders and investors. Society often comes in a poor third. How we balance these competing and often conflicting interests represents an existential question for the investment management industry. If we fail to answer this question satisfactorily, I believe our industry could face increasing irrelevance as regulators will reduce our ability to keep pace during a period of rapid change and hamper our ability to direct investment to where it needs to go.
Worst of all, our clients will remain apathetic, at best, to the products we offer. Enlightened self-interest should force us to confront these challenges of purpose. How can we better connect in the public's mind the huge service we perform as an industry for society? Our worth is self-evident in the developing world where growth can be stunted by the lack of well-trained, ethical investment professionals operating within a well-structured finance industry. How can we better demonstrate this value in the developed world?
Our planet does not lack for investment opportunity. Estimates vary, but the developing world requires about $3 trillion a year in infrastructure spending. Pollution remediation, clean energy and the desperate need for financial inclusion of all members of our globalized world (if we are to avert social dislocation) present challenges our industry can and must rise to meet. This is our duty and should be seen as a truly noble calling. Let's be loud and proud about what we in the investment management industry do for a living.
We also need to rethink capital market structures. Today's capital markets frequently set the stage for secondary transactions that don't build cars or planes, employ workers, or throw off any tangible value. The number of U.S. publicly traded companies has fallen dramatically in the past decade. Yet we direct the majority of retirement plan savings to these markets. Is this where the opportunities lie? As we continue to move towards a pension world increasingly dominated by defined contribution plans that transfer risk from companies to individuals, should we not be training those same individuals to take some investment risk and employing capital market structures that enable them to do so? The health and adequacy of any self-directed retirement system depends on this.
The dislocation of capital markets from primary transactions gives the public the impression that finance is a zero-sum game played between professionals with the savings of ordinary people. The sterility of the alpha generation debate adds to this feeling. Surely our purpose is not to beat an index but to help people achieve financial outcomes? Shouldn't this be at the core of our discourse with our clients?
I applaud Mr. Fink for the courage of his views. His letter gives us all hope that we can find solutions to the problems that we face. But we need to start from an understanding that the asset management industry represents part of the problem, too. If we cannot reform ourselves, what chance do others have? I call on all investment professionals to advocate more forcefully for an industry that has purpose: to help all members of the communities we serve achieve their aspirations.
