A Man of Words, A Man of Deeds

Two events Wednesday raised some interesting questions about the nature of corporations and the public good: the passing of Jack Bogle, founder of Vanguard Group, and release of the annual letter to CEOs from BlackRock co-founder and chief executive Laurence Fink.

Vanguard is the investor-owned, ultra-low-fee asset manager that currently holds roughly $4 trillion for savers around the world. Bogle’s mission in life was to allow people to own index funds without paying exorbitant mutual fund fees. As Joe Weisenthal tweeted, Bogle was the rare individual who could win accolades from people as politically divergent as conservative Sean Davis and the lefty Hamilton Nolan, the latter of whose 2016 paean to Bogle called him “a real fucking people’s hero.”

Bogle’s reputation was only part branding. New York Times reporter Jeff Sommer recalled today that Bogle, who could have made himself a billionaire several times over had he structured Vanguard as a typical corporation, took pride in being a mere multimillionaire:

Jack was proud he was not a billionaire, though he didn’t say so publicly. “I feel funny about it,” he told me. After all, in the United States, titans of industry are supposed to be rich. People are so often measured by the size of their financial assets, he said, and his were not really awesome.

“I don’t share those values,” he said, “but I’ve still been influenced by them.” In fact, he said, he was sure some rich people wouldn’t really respect him if they knew he wasn’t as wealthy as they were.

Vanguard is the world’s second-largest asset manager. The largest is BlackRock, which also offers super-low-fee index funds, albeit with a more typical corporate structure. Like Bogle, BlackRock’s CEO Larry Fink has also carved out a position of moral authority, in his case by sending out annual open letters to his fellow chief executives urging them to invest in the long term, avoid excessive buybacks, heal a broken polity, etc. Barron’s calls him “the new conscience of Wall Street.”

On Wednesday, the same day his longtime rival passed away, Fink released his much-awaited 2019 missive. “The World Needs Your Leadership,” he tells corporate leaders:

Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.

In addition to leading the world out of the darkness, Fink instructs his fellow CEOs to pay attention to millennials’ desire for “purpose” in the workplace. As Andrew Ross Sorkin notes, Fink’s letter seems to reference Milton Friedman’s famed 1970 op-ed on business ethics, in which he declared “The Social Responsibility Of Business Is to Increase Its Profits.” Friedman explained that the idea of “social responsibility” in business was “a fundamentally subversive doctrine” that was philosophically identical to collectivism.

Against this notion, which is echoed in C-suite grumblings about Fink’s letters, Fink defends the idea that profits and purpose can coincide:

Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked. 

I’ve expressed skepticism in the past about Fink’s follow-through on these sentiments, typically when in regards to buybacks. But it is interesting to see Fink taking head-on the theoretical prohibition against corporate do-gooding. Here’s his justification:

Profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.

As Fink notes, part of this concern for “purpose” is driven by external factors. Shareholder activists are increasingly pressuring firms and their owners to invest in good governance, climate change mitigation, and other ethical prerogatives. As the largest owner of corporate stock in the world, BlackRock is a natural target for many of these complaints (see, eg, the hoax Fink letter circulated yesterday by climate activists). So part of this is just shareholders expressing their preference.

It’s nice to think that corporations can fill in where governments have come up short. But this notion runs up against the fact that many corporations—whose shares BlackRock controls—are constitutionally incapable of acting in the interests Fink proclaims. ExxonMobil’s purpose is to be “the world’s premier petroleum and petrochemical company.” Clearly that’s amenable profit-making, but it is opposed to any purpose that includes serious environmental stewardship.

Retirement security, another issue Fink highlights, also raises contradictions. BlackRock’s low-fee ETFs have probably helped a lot of those lucky enough to have retirement savings hold onto their assets, rather than surrendering them to fees and mutual fund underperformance. But a bunch of the companies in BlackRock’s portfolio, whose leaders Fink seeks to sway, are built on milking IRA rollovers and other retirement fund services. It would be difficult to fully square their profits with Fink’s purpose.

Here’s where Bogle’s memory is instructive. Vanguard seems to be an uncommonly strong example of the “purpose” Fink describes. Among the innovative features of Vanguard was its ownership structure. Rather than issuing equity and serving shareholders, Vanguard was set up to be owned by its funds—that is, its customers. This mitigates the incentive for managers to jack up fees or take undue risks. It also restrained executive pay, as Bogle’s non-billionaire status can attest.

I don’t think it’s correct to say, a la Friedman, that corporations are incapable of following any objectives other than profit-making. Yet there is something to the idea that the corporate structure discourages responsibilities to any stakeholders other than the people who own the stock. The organizations Fink is addressing are not structured to provide for those stakeholders—“employees, customers, and communities”—that aren’t shareholders. The personal preferences of CEOs are subordinate to this fact.

The reason Bogle wasn’t a billionaire wasn’t personal preference—it’s because he structured Vanguard that way.

Fink, by comparison, became a billionaire last year.

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