The Changing Face of Investment: Culture, Harassment, and Governance on Display

“In the current environment, [the] stakeholders are demanding that companies exercise leadership on a broader range of issues.  And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrate the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.” 

Larry Fink, the Founder, Chairman and Chief Executive Officer of BlackRock, wrote these words in his annual letter to CEOs. 

BlackRock is the world’s largest asset management company, with $6.3 trillion in investments.  Mr. Fink’s letter speaks to the changing face of investor’s focus – not simply from quarterly returns and financial performance – but to governance and the long-term profitability of corporations that focus on ethical behavior and corporate culture.  

Expectations are Higher

Investors and asset managers care increasingly about corporate culture for good reason: it drives profitability.  For example, before the firing of one CEO in a high-profile case last year, it was reported that staff turnover in the organization was 30-40 percent per year.  When employee churn is that high, the cost of recruitment and business management goes up substantially, draining profitability, which can lead to unrelenting pressure on sales and tolerance of misbehaviour of high-financially-performing leaders.  

In an article titled, “Sexual Harassment is Becoming a Serious Investor Risk,” Barron’s cover story noted, “Companies that tolerate or cover up sexual harassment, perpetuate a culture that fosters it, or fail to provide proper avenues for employees to report concerns and offenses, could pay in multiple ways, from difficulties in attracting, retaining, and motivating talented workers to customer defections, ruined business deals, and lost revenue and profit.”