Larry Fink’s annual letter to CEOs is making waves for its pronouncement that “companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” Fink is the head of $6.3 trillion dollar asset manager BlackRock and the leader of a rising chorus calling on companies to stop focusing on whether or not their share price is rising quarterly and turn towards a long-term view of corporate success.
Fink’s letter is significant not only because it comes from one the oracles of corporate America, but because, as the head of the largest asset manager in the world, he has the leverage to back it up.
But his stance begs the question: What does it mean for each group of stakeholders—and particularly for employees—to benefit? It’s important to distinguish between his goal of corporate “long-termism” and a true stakeholder orientation, where employees and customers benefit just like shareholders when the company does well.
After all, corporate profits have been high for years, and yet workers have only recently begun to see real wage improvements. Even as the stock market reaches epic heights, wage growth for workers remains tepid. And workers still struggle to get decent health care and retirement benefits.
As part of his clarion call for change, Fink should explicitly name higher wages and decent benefits as part of how companies demonstrate their value creation strategy. In this era of increased corporate financialization—when public corporations act like financial entities by earning increasing amounts of profit from financial activities, while returning increasing amounts of those profit to shareholders—workers have little ability to bargain for a fair share of firm profits. (I detail this phenomenon in my latest paper, “Corporate Financialization and Worker Prosperity: A Broken Link.”)
Companies that are doing well could be doing much better by their workers. The recent flurry of wage pronouncements and bonuses announced in the wake of the corporate tax cut do not make up for decades of wage stagnation. Though the minimum pay of Walmart workers has gone from $10 to $11 dollars an hour, the total cost of that pay raise to Walmart is equivalent to just five hours of sales. For a full-time worker, they’re still making just $22,880 annually.
Fink should say unequivocally that poverty wages won’t cut it anymore for BlackRock. The foundation of corporate prosperity is a strong and talented workforce, but as Fink highlights in his letter, we are living through “the paradox of high returns and high anxiety,” in which we see the opposite: high corporate profits coupled with low wage growth, inadequate retirement systems, and increasing job insecurity.
What’s behind Fink’s call for a return to long term growth? In the postwar era, firms made money through what William Lazonick calls a retain-and-reinvest strategy, in which firms grew by investing in the productivity of their workforce. But beginning in the late 20th century, firms became hyper-focused on capital market pressures and takeover threats, and workers’ salaries and benefits became a cost to be cut. By the 1990s, maximizing shareholder value became the dominant mode for public corporations, driven by legal and regulatory shifts under the Reagan administration.
Not only did this put pressure on workers’ wages, but companies also responded by laying off a percentage of their workforce and replacing them with subcontractors, independent contractors, and franchises. Companies made the decision that firm profitability depended on keeping labor costs as cheap as possible and getting rid of the ancillary benefits of employment—like retirement plans. This corporate power dynamic has continued and leads to the economic puzzle we see today: record corporate profits and share prices, coupled with low corporate investment and wage growth.
To counteract the slow wage growth that Fink calls out in his letter, shareholders and investment advisors like BlackRock should prioritize wage- and benefit-setting practices in their corporate engagement, to ensure that those who actually create the value for the firm reap proportionate benefit. Leaders like Fink can also take a stand on public policy: If they support tackling slow wage-growth head on, why not support raising the minimum wage to $15 dollars an hour, which would raise the wages of 41 million American workers? Or support the ability to unionize, which has a proven ability to raise workers’ wages? Or, they could follow Germany and support a shift to board co-determination: To ensure shared governance power, workers could share governance of the corporation itself and co-manage firms along with other board members.
All of the above would counteract one of the biggest problems with dominant economic thinking today: the notion that dividing up the corporate pie is zero-sum, and if companies allocate more profits to employees, or to communities, that necessarily means a loss for shareholders. In fact, employees with good jobs contribute more to company growth than when wages are pushed to their bare minimum.
Fink’s call for corporate shareholders and executives to be held accountable for long-term value creation is absolutely necessary to change business culture away from an obsession with short-termism. But it’s not sufficient to wait for the benefits of long-termism to trickle down to employees. We need to rewrite the rules of corporate behavior so that workers have a real shot at prosperity.