Who Should Run the Corporation? A Conversation with BlackRock Co-Founder Barbara Novick
My. Name is Owen Wars Walker and I'm MBA - and I'm, a student leader for the corporation, society, initiative, here at the GSB. CAHSEE. Brings together experts, to, provide business. Students and policymakers, with. A more comprehensive perspective on the role of corporations. And capitalism, in our society. Through. Research advocacy. And education we, are rethinking some. Of the premises, and assumptions, about the role of private. And public institutions, in, our society. One. Of the most fundamental assumptions. In business, education is. The. Principle, famously. Articulated, by Milton Friedman that. The purpose of a corporation, is maximizing, financial, value for its shareholders. In. His annual letter to CEOs last year. Blackrock. CEO Larry Fink challenged as assumption, arguing. That company should serve a social purpose and, benefit. All their stakeholders, including. Shareholders, employees. Customers, and the communities, in which they operate. Mr.. Fink is not alone, investors. Academics. Politicians. And activists, are all, reexamining. The appropriate, role for shareholders. In. Engaging, management. Pushing. Companies to think long term and. Advocating. For a broader conception, of corporate purpose. The. Issue is not going to go away soon in this. Year's letter mr. Fink cited a recent survey which. Found the vast majority of Millennials, believe. That the primary purpose of business should be improving society, rather. Than generating profit. We. Are fortunate to have a guest with us today who is among the best qualified people in the world to. Discuss, the nature of shareholder, ownership, and its implications, for our society. Barbara. Novick is the vice chairman, co-founder. And a member of the global executive committee of Blackrock the. World's largest asset, manager with approximately, six point three trillion dollars in AUM in. Her. Role MS Novak oversees. The firm's investment stewardship. And public, policy efforts, prior. To black rocks founding, miss, Novick began her Wall Street career. The investment, banks Morgan Stanley and the first Boston corporation. Interviewing. Barbara today is not I ran, a full rule are a, business. Columnist and associate, editor at the Financial, Times ran. Had a family emergency and, can't be with us today, around. His place however is Paul flatterer the, Miller distinguished, professor, of finance at the GSB. Professor. Fliter er served, as senior associate dean for, academic affairs, from 2013, to 2018 and it's, Todd of the GSB since 1981. Following. Their conversation, we will continue by taking questions from you our audience, now. Please join me in thanking again and welcoming our guests. So. I'm going to start up this, interview. By. Trying to say something insulting which, is I'm sitting next to a big gorilla, as. You just. Heard and I'm sure everybody knows. Blackrock. Has over six trillion, under, management, which is a huge number just to put that in perspective there. Are only two countries in, the world that, have a GDP greater than that and I'm.
Sad To say that it's even greater than the California GDP. Which I just looked up is 2.7. Trillion so, in. Any event that. Obviously. Is. Important. For what we're talking about because, Blackrock. Is in a position, because. It's again, a big grill I hope you don't take offense with, that. Too. To, make change and I, just want to read before, we get started something, else from there. He thinks most recent letter. Society. He writes 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, so the. Series of questions that I'm going to ask here, are going, to be focused, primarily on what, can bat Blackrock, do what. Is it willing to do and how, does it plan to do that but. I want to go back to, Milton. Friedman which. Owen, mentioned. In, his introduction. Originally, when Milton Friedman, wrote his. Article, back in 1970. He talked about maximizing. Profits, that the management. Of a company owed, the, owners, of the company, the duty of maximizing. Profits, all the years that I've taught finance, we've sort of translated. That into maximizing. Shareholder wealth. As measured. By the, price of, the stock today if you're a manager you do something, for the shareholders, the price is going to go up otherwise it'll, go down and. So. That's, a bit of a reframing, of Milton, Friedman, but. I want to ask in. The course of these questions, if we're reframing, Milton, Friedman yet. Again by. Saying, that we're going to maximize long-run. Value, and in various. Letters he. Mentions, long term 37. Times and those those those two letters so, I want, to start. By some, hypotheticals. And. Of. Course yeah. Exactly. Since, you're on a roll you're all on a roll about. Yeah. Okay. So you, know clearly we've, heard that question and. You, know Fink versus Friedman which ones right and, I don't think it's a right or wrong and, I think I'm gonna start with a historical. Perspective and then I'm gonna you, know drill into really. The difference between the two and the nuances so the historical, perspective, is if. You go back even further than Friedman. Johnson. & Johnson. 1943. General. Johnson writes the credo and what. Is the credo for Johnson, and Johnson it says, we, need to consider. Employees. Clients. Or, customers and, communities. We live in as well. As shareholders so, it's, not that it's such a new. Concept and, boy it's like this lefty thing and it comes out of the blue but. It's, actually, I would, say good, business. Common, sense so, I'll, give the the other historical, perspective, what, went wrong with world come and Enron. BP. You. Know recently, Wells Fargo mean or all, of these things not, very, closely connected of, people. Trying to in some way maximize. That short-term profit, right, now especially Wells, Fargo, right, that, they're going to make a quick buck it's going to be great for the stock price, maybe. Even great, for their own compensation. But. Is that good. For long-term, value, well, clearly not in every one of those cases you, would not be have happy, happy to, have been a shareholder, so, when you look, at what Larry says, and he does put it in that context, of long-term ism, like, what, are we asking people, to do is, it unreasonable you're, all going to be looking for jobs I assume if you're a second-year students.
You. Know do, you want to work at a company that treats its employees well or do you want to be in a bucket shop you, know do you want to be someplace where you get flexible, benefits where you can wear blue jeans to work I mean what things and everybody's. Definition of benefits, are different. But, as a company you, know the, company, has to be thinking how do I attract. And how do I retain. People. To work here whether it's at a low level and a assembly, line or it's at a high level and in. The, United States today you can't help but notice we're in a war for talent and. Human. Capital management should. Be a really, high issue. On. Management's. Agenda on the boards agenda so, is that Friedman, or is that Fink, customers. I'm, proud, to say we've been in business 31, years, start. Our institutional, business a few years into it we, have clients, today who, have been clients of Blackrock, for 25, years. Now. Why is that good one it's a real vote of confidence we, also have clients who have left, their jobs and multiple, times hired us as they've gotten to new jobs, again. Tremendous. Vote of confidence but. From a shareholder, value perspective, and from a economics. Of the firm the. The, saying, your, best, new customer. Is your existing, customer, is absolutely. True the, cost to acquire new, business, to you, know on board new clients that, is extraordinarily, expensive. So if you don't retain the ones you have, you're. Affecting, the long-term value now, again could, you do, something that maybe juices, your returns early, on and sell, people things that they wake up later and realize they don't really want I guess, you could, but. Then do you have that customer, for 25 years so you, know rather, than looking at these as friedman versus fink i would, say these are fundamental. Business issues. We're, going to throw the communities one on there clearly, if you are not, operating in, a good way I mean look at this dam that just broke I mean, what's. Going to happen, to some of these mining, companies, and are, they, gonna even have a license, to be in business in those places so, it, in looking, at the multiple, stakeholders I, think people have to put a little bit different lens on it that, this is good business judgment, and this, is about will, you be in business in five years in ten years, will, I end, up, better, off holding, you as a long-term, investor, because, keep in mind you talk about the six trillion dollars let me break down that six trillion a little only. Half of it only half of it is equities, only. Three trillion yeah okay. And then, of that ninety. Percent is, in index strategies, Gorge index. Strategies, and ten. Percent is active, now again. Ten percent of three, trillion is still a big number but, ninety, percent is is index, well if it's in the index. And. We don't like what the company is doing we don't like the business they're in we don't like the management team we don't like something we, can't sell it. So. If we're going to be long-term. Providers. Of capital we.
Have To have some other way of. Influencing. Or, expressing. Our views, so. In fact what. You're saying is, that oftentimes long-term. Value is completely, aligned with, what Milton Friedman is saying in the, sense that there are a lot of things that can be done that enhance long-term value and ultimately. Redound. To the benefits of the shareholders, in their portfolio, holdings so. An. Easy, case, is one where there's, something that a company can do that. We'll both, produce, long-term, portfolio, value, I'll call it and, also. Potentially. Value. Outside of the portfolio, the world will be a better place healthcare, will be better so on and so forth what I'd like to explore, is. Situations. Where there's a potential trade-off, so we can define a, retiree. Cashing. In on a portfolio and, there's, the amount that is there in the, account and then. There is outside, of the portfolio, return. Which, is hard to quantify but it's what, kind of world do we live in what's. The state of the environment and so on and so forth, so it's easy when an, action can be taken that increases, both of those how. Do we think about cases. Or do we think about these at all from. A fiduciary, standpoint. Where, perhaps an action can be taken that might reduce the portfolio. Value by a little bit but would have huge benefits, to the, clients, on what. We would call the outside, portfolio. Returns, Milton, Friedman I think would then say. No that's not right. But, I don't think if we are talking about the win-win situation. There's any distinction, between what Larry Fink is saying and what Milton Friedman would say so. Two. Different things one is that an individual, company level and I think that is up to the management of that company, to say you, know I think it's worth you, know spending. Money and for example we just announced a financial. Literacy program we're, going to spend money on something that clearly has nothing to do with our immediate. Business, but, we think that as a philanthropic. Initiative. It's an important, one for society, at large it's, something we think you. Know is good. For us to do it's something we're, associated. With it has some. Hard. To quantify but let's say brand effects okay. That's. At the company, level and that's an individual, company, decision, of what is best for my company I think, what you're asking is more at the portfolio level okay. So I'm, gonna step, back again, about. 20, years ago we started, seeing people, talk about socially. Responsible, investing. So. Show response investing, was things like you, know I'm a. Medical. Company, and. I, don't want, to have or I'm a hospital, I don't want to have cigarettes. In, my portfolio. Now. I joke today and I say with that same company when, cannabis, becomes, legal, would they say I don't want cannabis, in my portfolio you, can think about that one and talk about that after I.
See. Some some smiles. I mean it's a good question right where. Do you draw the line or. You might have a religious, order that says you. Know I don't want anything to do with defense, or you, know pick some other category, that's all fine that is socially, responsible, investing, it. Is driven, by the client, it. Is a choice, they're making about their, values. I want. A portfolio, that lines up with my values, and I'm, willing to take the tracking error perhaps. Under, performance, may be over Boris but certainly. Tracking, error to, the broader, market. To. Get, what I want, from a value perspective or. Values, perspective, that. Is very different, than what we talked about today so, today we use the phrase sustainable. Investing. What. We're looking, for in building a portfolio is, do, we have a portfolio, if, it's let's say an active, portfolio can we build a portfolio where, we're thinking about these. And I, like to call them GE NS because, I think governance, comes first, we're, thinking about these GE. And s factors. And we're. Thinking about them from a portfolio. Maximization. Standpoint. And so. It's not a conflict, it's, not a I need to give. Up some return to, do good which is sustain the, original, socially. Responsible, the sustainable, says you, know what I think I'm. Gonna win long-term. With. A more, sustainable, portfolio. And you. Know the data is hard, because. It's. Not complete, and it's not long enough and there's all sorts of flaws but as, people. Are doing more research the. Data is starting to become much, more compare, we did a paper recently on, emerging, market debt it's. Very clear you can build a portfolio that has as high, and maybe even higher yield and, has. Better ESG, characteristics. You. Can in, equities, also, we worked, with MSCI, to, create a new series, of ESG. Indices, and that. Series, has very tight tracking, error to the quote unquote mother, index, and what's, different is we're. Waiting. Companies. That have better ESG, characteristics, we're not eliminating. Sectors, okay very, different than saying let's take this whole industry out but. We're saying within an industry we, want the best ones, why. Because. We think that's operational, excellence right. So if we change the wording, of how people, talk about it you. Wouldn't even think of, it as quote, ESG. You'd. Say this is good value this, is good long-term thinking, this is a way to maximize, the, value of the portfolio and, I would say as a stewardship. Team you. Know because of that ninety ten even, active portfolios prefer manager can pick this one or that one we, have indices, which, are optimized, for ESG. If clients, pick those indices that's great, in some, portfolios it's, just a plain portfolio, and you know the clients haven't expressed any interest in, anything special, but, we can still go to those companies, and talk, about these long-term issues. And try, and move them to be better on those, so, there's different ways of sort, of implementing. Sustainable, investing, depending, on what the mandate is so, that's a very good segue to my next question, which is how. You potentially. Can affect change and. The. Thing that people originally. Think ever quickly, think of is of course proxy voting, but. I understand, that you're much more I don't, put words in your mouth but. You're. Much more. Inclined potentially, to engage. Behind, the scenes and, you've. Gotten some criticism. For. Example, I just wrote, this down from an article saying that you, only voted in favor of. 3. Or 40 resolutions, on climate, changed, of nine resolutions, on public health -, of 24 resolutions, on worker rights and, welfare so, perhaps take, a moment to tell, us first, of all how you think about proxy, voting but, maybe if you can tell, us some, individual. Cases maybe. Without getting into details of where. You've had effect, on an. Encompassing. That. Produces. Good. Maybe we're not aware of okay, so first thing is I want to talk a little bit about what investment, stewardship, is and isn't, and. Then I want to talk about some of the numbers because I call, this our Goldilocks, problem. Do. We do too much do. We to do a little I like to say the porridge is just right, and. It. Is the Goldilocks situation. I was at a dinner last night I was a speaker, and you, know one person, got up and asked me a question about you, know why, are we taking, political, positions. On certain, topics and voting.
So, Much and you. Now quoted, from an article it says why. Aren't you voting more so. For. Starters voting. Is the end of the process right. The, process, starts with what we call engagement. First we. Would much rather engage. With management engage, with directors, tell. Them what concerns, we have and, let. Them think. About those and on their own if, they agree, move. In certain directions we're. Patient we're gonna be here a long time the index money is not going away so if, we, can do this in a way that the company internalizes. It or them beat them over the head, we. Actually think you end up with better, results and. Better. Long-term results, especially so. That's the first thing the, voting, itself, to, me if we, are voting against, management it's, a little bit of a failure of engagement, right. So, if we, ended up with a year where we had zero votes against, management is, that a success, or a failure, well, if we had gotten some results, through engagement and we had moved people in the direction we thought was the right direction to go then, that's a screaming success. But. People, can see the voting numbers, cm. Analyze, them quantify. Them and they, come up with all sorts of theories so. To, put some numbers in perspective, you'll. Find some people will say the large managers, just, follow ISS, you'll. Say other people say you, know these managers aren't voting enough, you'll, get every different cut because, everyone, can take the data and see what they want in it it's, very simple if you take the Russell, 3000. We did the study for the the proxy, year ending 2018. If you. Take the data there, are. 28,000. Ballot items of, those. 98%. Our management proposals. Well. Management, proposals, are here's, my slated directors, please, reappoint, the auditors, maybe. There's a say on pay in there, so. Let's, say almost all, of the 98 percent is, not, controversial, there's. A little piece that's controversial, you might have a director, who there's a problem I mean there are issues in there but. 95. Percent support. On. 98%. Of the proposals, so. You can see mathematically. How we, look like we follow ISS, in fact every. Investor. Looks. Like they follow each other mathematically. So, you can make a story out of that and people have on the. Other end of the spectrum you. Take the 2%, out and that. We did this study and it's all on our website do. The study of five, large managers, and what we found is. The. Range, of, support. For shareholder, proposals, went something like this ISS. As a proxy Advisor recommended. In favor of, 70%. Of shareholder, proposals, and share of all the proposals these are the controversial, ones you, know disclose. Your political activity. Spending, or. Something. On climate, or something, on supply, chain I mean this is where, the controversies, come in and then. When you look at the managers, at the high end they were about 30% and at. The low end they were in the teens. So. Now you have people on one side saying, you're following, ISS and you know you're, you're doing something terrible to corporate America, because you're always voting, with with ISS, okay. And, you have other people saying hey, wait a second you have all these shareholder, proposals, and you're, in the teens when. ISS, is at 70% now. If you actually read the proposals, that they're criticizing. You'd. See some of them are like, outrageous, like. You would never want, a company. To be forced, to do some, of the things you, know it's it's micromanaging. The company at a level that just not appropriate and, in. Fact the SEC even, excludes. Some right they give the company.
The Right to not, put it on the ballot so you, know I think the, devil is in the details, on a lot of this stuff and you. See tremendous amount, of media coverage, I. Don't, know why maybe it's fashionable, but, everybody, taking, the numbers and cutting, them the way they want to tell the story they want and you, know it's a somewhat, dangerous thing I have I have three kids and they're all similar, age to this, group and you. Know over the dinner table, over the years you, know we would have civics. Lessons and I'd bring home a newspaper article and, I'd say hey, let's talk about this newspaper, article it's a weird house I know and. You. Know it would, be something that I knew was like absolutely, outrageous and my. Point was I wanted to teach them critical thinking they'd read it and we talked about I say now if I told you this, statistic. Was, taken, out of context, and here's what it really is now, what do you think of the article they'd be horrified, and I said well that's how I want you to grow up I want you to be adults I want you to look at these things and not just take them at face value, because. Even I was a little bit duped by the follow I assess, it first and I was wracking my head I got 40 people maybe, we should fire them all like what do I need to pay if, we're just gonna follow ISS I said that can't be I know we're, not voting that way and it, took a while till I figured, out there's 98 too and. Then. You saw the numbers and you said oh okay, this is just silly but. That's, you need to really look at these things much more critically, because, people, are taking that data and it's, it's absolutely amazing, the number of stories that are, coming, out and each, one taking opposite. Perspectives. So. Let me take this in a slightly different direction. Obviously. You're. In a position potentially. To, influence. Through. Voting, or engagement. Corporate. Actions. But. There's another concern. That has been, much. On people's minds over the last decade. Or so or probably longer than that and that is the fact that in, here. In the United States and certainly other places as well, corporations. Lobby. For. Their own particular interests, potentially. Against not only the interest of the public but the investing.
Public And. There's, been concerns, raised about auditing. Breaking, down we had concerns about rating. Agencies, being. Conflicted. I. Still, Bank I'm afraid. To say at Wells, Fargo. Because. I just did too lazy to change my account but. Things. Have not always been hunky-dory. There that's a technical term we use in finance so. How. Do you how, do you think about that. And. Feel. Free to say, whatever you can on this. Lobbying. Blackrock. On. Regulations. On, policy. PCAOB. What have you to. Basically. Protect the investing, public and, and and the wider public, given. That you hold a very wide portfolio and. Your, clients, are a, broad public that, are interested, in overall. Investment returns and and and, other things as well so. About 10 years ago we. Started, the public policy, group so, our founder of Blackrock the first 20 years I spent building, the business so working with clients marketing, business. Development client. Service all those wrapped together. The. 10 year mark we're, sitting, at 2009. Wake. Of the financial crisis. And we say, something's. Going to change but, what and we. Realize up until then we have never had a public, policy effort, with, zero resources we. Had only once, lobbied, and issued and we hired some firm in Washington and, you. Know they dragged our president, at the time around, to a few meetings the, issue sort, of died, a natural death and that was the end of it we, had never had any involvement in, political issues, or policy, issues, for. Anything and our, working assumption, was. Oh if, there's a policy issue somehow, the street will take care of it like that's not really our job they just do that and, keep, mine we were also we started with a small company we had nothing we had a blank piece of paper and you. Know we grew from that so you were very focused on starting, our business but. Here we are at the 20 year mark were a much bigger business, not. Quite as big as we are today we. Did a big acquisition along, the way, but. We're. Substantial, and we're saying wait a second, the, street, was a source of a lot of the problems. We. Don't know what changes, are going to be made but are they gonna represent investors. Interests, or are they gonna be sort of fighting for their own lives and for their own profitability, and really, looking at things through a lens of what's good for them and our. Insight, was we needed to have a voice of investors, and that. Was I think a really important, thing so we, started, the group in, 2009. The. Concept, being there should be a voice of investors, at the table for financial regulatory reform. We're very public, and saying we supported, reform. And we, had some criteria in terms of transparency, being, good for investors and things like that those, things are still there, a little bit mom and apple pie but they're still true today little. Did I know that this was going to turn into a full-time and then some job I mean we have a whole team of people today, we, had zero and, it's. Become a global, thing but, it's everything from money market funds to ETFs. Market, structure, products. I mean you name it the. Importance. Of having an investor, voice is huge, now. The other funny thing is think, about the money we manage we, manage other people's money, we. Don't manage our own money we don't have a balance, sheet per se so. Let's. Say you're a large pension, plan and you, hire Blackrock, to manage your money and you hire ten managers, do. You at the pension. Level, do. You go and lobby, the, answer is no a lot of these pension, plans have very. Few people home it's, not none and Here I am in California, you have pers, and sters and, they're very vocal but, the average pension plan in America, there's, a handful, of people home and whether.
Its Corporate or its public the, last thing on their list is, that they're going to get active, politically. So. They've outsourced, the asset management, they. Just assume you're going to take care of things for them so. If we don't engage on, policy. Issues who. Is going to represent that and that's actually a big problem in, the, way our system is set up a handful, of times we've gotten clients, to come. In and attend. Something but generally they are not interested, and yet. In Washington. People will say to you if this is so important, to your clients, how come we never see them but. The, model, is an outsourced model, that's why you don't see them they don't have anyone to even do that so, I do think, it's important, to be involved in policy I think I'll. Say knock on what I think we have been. Effective. In a constructive, way everything. We do is extremely transparent. If any of you have insomnia and want to go on our website we, publish, lots, of, materials. We publish viewpoints, which are policy. Positions, we. Submit, comment, letters we, do these all, over the world and we. Put them all out for everyone to see so, there's, no backroom, deals there's no you, no funny business it's, a very transparent. Very. Solutions. Oriented try, to understand, what problem, regulators. Want to solve or legislators. And then, offer, constructive. Solutions. That, are good for investors. So. Let me ask you I want. To read another. Quotation. From, one. Of their ease letters, I think it was either this year last year I can't remember. He, writes we have no intention, of telling companies, what their purpose should be that. Is the role of your management team and, your, board of directors rather, we, seek to understand, how a company's, purpose informs, its strategy, and culture, to, underpin. Sustainable. Performance. So--that's, am a CEO I have, a company and, my. Core competency is. Acquiring, drugs and increasing. Prices to maximize, profits. And, I, determine, and with. The board that this is the best way to maximize. Not. Only short term but long term it may not be the longest term but long term value. So. Do you just take that as given or, do. You a, little. Bit let's, take the real example, there's, a. Point. Where, it gets pushed back right so. You. Have reputation, risk you. Have regulatory, risk, you. Can say that's my strategy, that's that's, my plan, but. Is that a long-term sustainable, plan I would, personally, I would question it right, because. There. Will be pushed back and in. The. World we live in one of the other things Larry talks about in his letter is you, know in a world of social media and Millennials, you, know companies. Will be targeted, and, they. Can't just, act in. I'll. Say irresponsible. Ways without. There being consequences so, I don't think it's a conflict to say I think, that that kind of behavior will. Be self-correcting. Over time and I. Think if Milton Friedman, was here you, know he's probably like turning over in his grave somewhere, looking, at corporate, malfeasance, you. Know yes it's nice to say, profitability. Is the most important, thing but. How, about ethics, and just. Common. Sense in, good, business judgment and I think that's what's gotten lost along the way in some of these failures. So. Let me ask you we. Always talk, about in. Any one of these endeavors how, do you measure the outcome and so. You're. Set. Out to, change. Companies in terms of thinking, about long term strategy, and do. A number of things now I would guess that some are easier. To measure than others board, diversity things, of that sorry but, when we talk about these, long term values. For both company, and for society, do. You have in your mind some way of measuring say, 5 years 10. Years 15 years out, whether. You, move, the needle or not and how would you do that right, so that is a very challenging question there's, no doubt in my mind but, I'll give a few examples, of how. I would think about it and and, again it's not the academic, study, and and rigor but, certainly, things, that you can observe. So. One would be looking at governance, and looking at governance over time when, I started my career the, normal, corporate board, structure, was.
Frankly, A bunch of guys who. Were all CEOs, who, all sat on each other's boards. That. Was just the way it was and that was accepted that was considered reasonable. Today. You. Don't see that at all certainly not in the United States today. If. You are a sitting CEO, chances. Are your board says you can sit on no outside boards. Or, maybe one you. Don't see a CEO, on a bunch of boards and all, on each other's boards an, independent, director, 10. Years ago wouldn't. Be uncommon to find something on seven eight nine boards I mean that was like their income it was a retirement. And you know stay, involved, and have a portfolio of things to do today. Our. Board, we, limit them to four including. Our board and that's, not uncommon, and when. We were voting, and looking, at directors we're, looking for directors. Who are qualified. And. Engaged. And if. They're missing meetings if, they're. You know on too many boards are going over boarding I mean these are flags, for, are they, going to do a good job in the board room I mean think about your bank. There. Were so many whistleblowers, there's so many people quitting, how. Could they not. Notice. Well, then they're not an engaged board right so, I use, that example. They, look forward, or the most recent, is I'll. Pick on purpose. We. Think of purpose, as you. Know sort of I'll say long-term. Strategy. Closely-related. Called. The, three of them are sort. Of a continuum. That if, you have a clearly defined purpose, some people to call it it's your North Star where do I want to be long term how, do I have a long term strategy that matches that how do I get employees. Excited, about that and really, sort, of bring things together put, whatever word you want on it in. The last couple, of years if you look at annual reports, and we did some sort of AI stuff, on on some annual reports you'll, see an increasing. Number of CEOs. Have. Started talking, about their, company, differently, and they, are if, you look I forget, if it was two letters back or three letters back but, one of Larry's letters he said I want you to lay out your long-term, strategy, I want to know that the board has, approved, that strategy, and you're, starting to see boards. Get much more, engaged, in that way you saw you see in the CEO letters, in the, Investor. Day presentations. That. Is shifting, in that direction that has nothing to with us voting, that has to do with us sending, a letter right. And you. Know definitely, reinforcing. It but it makes people think differently. The. Long term the only test I can think of which, is not a very easy to quantify but it's an observation. Test is, how. Many spectacular. Corporate. Failures, do we have how. Many, incredibly. Bad lapses, in judgment if we, go for a long period, without that, it. Means we've been wildly. Successful. I'm. Going to just have one more question then we'll open it up to two. Questions from the audience and I'll. Again, read from one, of Larry's letters, and again I apologize for not remembering which one it is but. He. Writes your company strategy you must articulate, a path to achieve financial, performance to sustain that performance, however you must understand, the societal, impact of your business as well, as the ways that broad structural, trends, from slow wage growth to, rising automation, to climate change affect your potential, growth as I read that I was thinking. There's, a collective, action or a free rider problem so, I'm a CEO, I would love to see all the other CEOs, in this room, increase. Wages so, that people, can buy my product, I would love to see everyone take. Actions. To reduce co2, emissions, and, you. Not have to do it and, so, it occurs to me that. You're. In a position is, Blackrock. Potentially. To put, some pressure on to. Solve a collective, action problem where everyone would like to see someone else do something do.
You Think, about it in that way or, do you think about just engaging each company, and trying. To convince that company. That it's in their interest even. Though there is this underlying collective, action problem right. So first, thing is and. I think in one of the quotes you said we don't tell companies what to do right we, ask a lot of probing questions, and we're, trying to understand. And, be. Informed voters. Right, and we may give some pushback and we may say you know that doesn't sound right to us you, know do. You do an employee opinion survey, right, what does it say you know we do an employee and pinyon survey and I'm excited to say ninety-one, percent of our employees last. Year said they're proud to work at Blackrock. That's. A really, good thing right. And there. Is some research from academia, that, you. Know companies. With more. Positive. I'll say HCM. Policies, versus, more negative have, better, results, and companies. With problematic, policies. Have, actually, some, bad results, so you're. Starting to see that research, you're starting to be able to quantify some, of these things and you, know it's a little bit of an art it's not the most perfect science, but. We do encourage, people you. Know diversity, is a big one you, know do you really think, that, a group that all. Went, to the same schools looks, the same talks the same has the same background do you really think that they're gonna challenge each other or, are you gonna get a lot of groupthink get. A both, miss the new opportunity. Trend and probably, miss the, car coming around the corner that's going to run you over in the street so, you, know I think it's a combination, of, things that we can encourage, sir, things but. Keep in mind even with all that money you mentioned at the beginning. Women. Already shareholder. Generally. Single, digits, so. Even if Blackrock. Says X. That. CEO, has, a fedora sponsibility. To all shareholders and if. 90% of the shareholders, say why. And we say X, okay. We have an interesting idea and it's, not really very relevant so it's only if a lot, of their shareholders. Have. Similar. Comments, and similar, views that, they would, then, integrate. That or if they say well that's a really good idea that's something we, haven't been thinking about your. Question, makes me looking. At the CEOs, and the. Fact that in their annual reports, in their their their investor. Day presentations, they're now talking more, about purpose, they're talking more about long term plans, I think. They've adopted that, as actually. That's a good idea I think. Many of the companies, will tell you they, want long-term, shareholders. They. Want patient, capital they don't want all these people who are flipping their stock so, if that's something that helps, them with, the long-term shareholders, they consider that a positive for their business, okay. So I think we'll open it up for questions. Relates. To governance which. Occurs, to me a lot I first. Of all I have. Blood with Blackrock. Is doing. But. It has occurred to me in the governance, sense how. Do you reassure. Yourself Barbara. That what you're doing, because mostly, Blackrock. Is a fiduciary. It's. Managing. Not its own money you made that point but other people's, money. Do. You do, a systematic. Polling. Polling, probably. Is not practical.
But A systematic. Outreach. To. The people, you represent as. Investors. To make sure that. Your taste is, in sync with theirs okay. It's, a very interesting, question it, would actually be impossible. To do that okay. Why, because, we have millions of investors in, our funds. Well. I guess we could do some sort of sampling but, I would, say what we do is were, very transparent we, put our voting record on the website there's lots, of ways of. Saying. Do, I like this provider, where that provider or that provider there's, plenty, of competition, in our industry, and, actually. Commissioner, Jackson has talked about wanting, more, transparency. That buyers, should be. Certainly. Informed. And aware and he's, looked at we, just revitalized. Our website and reissued it in in January, or relaunched it in January and he, he said he thinks it's a model of what people should be doing so we put our voting. Guidelines, we put our engagement, priorities, we put a quarterly, an annual report, with. Engagement, examples. We. Put our voting record we, put all of our viewpoints. And comment letters like everything, we're doing is, extremely. Easy, to, see positions. Were taking, and, anybody. Who wants to be informed can be they, can choose us that, can choose a different provider we're, not the only ones with a website so, I'd say that is the direction of travel terms. Of being a fiduciary there's a very interesting sub, questions air. So. Take the example, of we. Manage, thousands. Of portfolios. And. Even within the fund family we have hundreds, of funds so. Let's say there's a merger let's say your friend is buying, drug. Company. We. Could be on both sides or. We, on both sides the same in every portfolio. Probably. Not so. Our voting, is actually, portfolio. Specific. So. We have through, our Aladdin. System when. We're voting we can see not just how many shares we have but. What portfolios. They're in and, if. It's a merger, type situation, we will do an assessment. Portfolio. About portfolio. What, is in the best interest, as a fiduciary to. That fund. That's actually very important, and sometimes. We end up with split votes. You. Said you engage with companies, and. I understand, the problems with index. Funds but, up the S&P 500, stocks how many of you engage to is in the last three, years a. Person. Meeting with an executive alright. Um, you know I don't have the numbers of top my head we put in our annual report we actually have a table, where, we talk about the number of engagements and, the number of companies and I'm sorry I don't I don't know the number right off but, it's a large, number the. Team is worldwide, forty people. We. Do try and prioritize, you. Know there are some companies who say well we don't really see any issues, so you know there's not a lot of reason we. Do a lot, of events. In addition to individual, engagements. So we'll go and we'll speak at events we'll talk about the things that we, consider priorities. We'll, do a lot of bilateral meetings at those events so it's a combination of different ways of engaging but. It's it's a pretty high percentage. Thank. You for being here. The, last event that Cassie. Had cohorts inside initiative, was, about corporate, accountability. And. We had a short seller a judge and a reporter, so, they were. So. You're in the long Investor, we had a short investor, who's interested, in fraud specifically. And it, was for about Tesla, and West. Fargo and, and the, judicial says their justice system when it comes to corporate. And. Individual. White-collar. Crime. In particular and. This. Sense from there was that then it's not that. Greatest, situation, we're better than. Brazil. We heard at the end so. We should take comfort of that, interruption, but, so. We do, system, but there was a sense that executives. Are not held accountable for things, and a chance to read the independent, directors report of West Fargo for. Testimony, I gave and it. Seemed, like you. Know. Not. Necessarily, going to jail but even financially. There. Is not, enough, individual. Accountability, for, investors, even in the settlements, and Judge, Rakoff was complaining, about the. Justice, system, what. Position, does Blackrock. Have on on, that. Issue of, accountability. So. I would. Say we would rather see more personal. Accountability than. These huge corporate, fines because. If you think about these huge corporate fines it's. Coming from the shareholders, right, so, you're, punishing the. People who. Really. Didn't have anything to do with it and, didn't. Really have a lot of control, to change it and then. You're, giving you, know some huge check to somewhere, and that's, coming out of shareholders, I would, much rather see, and, this is a legislative. And regulatory thing. This is nothing that you know Blackrock as an investor, has any control over but, I would much rather see, you.
Know Settlements. Per se or, accountability. That, is tied more to the person and you know and some are you James around the world that's the direction it's going. There's. A radical interpretation. Of what Larry Fink has been writing about with Blackrock is doing that there's change in any of what the purpose of a corporation, is that should be serving society, about the maximizing, profit because also a very mild version of it which is the, purpose has not changed it's still the maximize profit, but that, Blackrock. And Larry fingers now has, a different idea about how to do that the long term it's more around sustainability, so, do you think that the the purpose of the corporation, that the objective, function the corporation, is trying to solve has, not changed, still to maximize profit. Pretty. Much I mean what we say in the letter this year is purpose. And profit, is inextricably. Linked. So, if you go down the path of it's all about, purpose. Nothing about profit, you. Won't be in business right. There won't be anything. To argue. About you. Have to look at these two as somewhat. Symbiotic. And. I go back to the business examples. If you treat your employees will, probably. Have lower turnover lower. Costs, of acquiring employees. Lower, costs of training employees same, thing with clients, treat, your clients, well they'll be your clients, they'll come back they'll shop in your store whatever. That the you, know product or service that you're offering, having. Long-term clients. And loyal clients, is an, extremely. Valuable thing, you know if you burn your reputation. It. Can't possibly be good for your brand so there's, lots of different ways of looking at it but I don't think fundamentally. That. These you. Know sustainability. Issues, are all, that different, than saying good business judgment and how. Do you stay in business for a long term. Some. Ways a reaction, to government, perhaps not providing, enough corporate. Oversight or is it because we, as the American. Populace is not civically engaged enough, I'm wondering if corporations, are now compensating. For perhaps, to, our groups. That should be holding corporations accountable. Yeah. I think there's been an evolution.
Certainly. 20. Years ago asset. Managers, were not very engaged, in, stewardship. Not zero but not as much as they are today. For, us as, a company the, big change was when we did the acquisition, of BGI. This. Is where all the Passavant assets, started, from and all, sudden we went from being a relatively small, equity, manager, with, only active, portfolios. To a. Much larger equity. Manager, with, a significant. Amount of passive, and we. Started, thinking about it differently but, even then it took us a couple of years to sort of really, get our heads around well. If we, are a long-term patient. Capital, investor. Then. We. Need to protect, the downside and, help. In maximizing, the upside so, investment, storage for us is an, investment function, at Blackrock, it's. Not a thing, over on the side it's actually part of the investment team. Question. So a few days ago those of us poor CFA charterholders or, CFA candidates, received. A very concerning. Email, from the president of CFA Institute that, the. Institute was investigated. By Department, of Justice and had to pay like three hundred thousand, dollars of fines because, they were blamed. That they, discriminated. Against, us employees by, hiring some temporary workers, to, grade exams and, this. Is an example of this like I guess what by American hire Americans and, what's. Your view on that and what, effect it, has on like corporations, and society. So. They're actually not on the CFA Board at. One point they did ask me to be and I said well I'm not a CFA, charterholders I don't, think I should be on your board I don't think that would be. Seemed. It. It, seemed wrong for the organization. I am, on a committee, that they have which is about the future of Finance. And, this. Came out of the crisis and some of the accountability. And morality and ethics, and you know things like that but I'm not a board member. Can. Be a force for good governance, and. I guess one, question I have is how. Do. We govern, Blackrock. As a society, to, make sure that the way you're doing governance, sorry that we want, and. One particular, example stands, out is there's. Been a lot of this research on this common ownership problem, that. If corporations, respond to the interest of shareholders. Shareholders. Of highly diversified then. There's really not that much incentive report raises to compete. This, can just be as innocuous as you, go there every day and, you say we, want you to focus on long term research and development. And the CEOs have no time to then do competitive strategy, and try, to fight a price, war and so, I'm, not trying to say the. State of exactly what's going on but. If how. Does do we a society, right. Engage. With a giant corporation like Blackrock, who a lot of us can't afford to not do business with and then. What happens when we. See thing is that the, governance of the way that Blackrock is operating, isn't. Fulfilling. This link broader societal objective. Okay, so yes an excellent. Question and. I'm going to encourage, again, lots of things on our website in fact we have a whole section, on common ownership but. Let me step back let me talk first about concentration. And then, about the common ownership theory, and and some of the flaws, on. Concentration. We're, actually doing, some work right now to look at you. Know Blackrock. Take global, equities, we, manage about four and a half percent, it. Turns out vanguards about the same there smidgen, ahead state. Street a little bit less so. If you add up the top three. Managers. You get to eleven. Eleven. Is not fifty eleven, okay. So a lot of the articles, that get written, and I found this throughout, the financial crisis. Aftermath, a lot, of people forget that. Asset, managers. Manage. About. Let's. Say 25. To 30 percent of the investable, assets a huge. Percentage, is managed by sovereign. Wealth funds pension plans endowments.
Individuals. For themselves so. Sometimes. Called the denominator problem. Sometimes. People will talk about how. Much index, funds there are and if. You read the numbers, carefully they'll say you, know index, funds are taking, over and it's 40, percent or 45, percent if. You read carefully says of mutual, funds but mutual funds are only 20%, of. The. Investable, universe so, you have to know what, the denominator is, that, that you're looking at so this first thing is the concentration, is much, less, than. Certainly. The popular, press articles, and some, academic, articles from other institutions. Might. Suggest. I'm. Sure that kind of work wouldn't come out of here or not. But, that's the first part the second part is a common, ownership theory. And. We, we put out two things recently. One. Is we submitted a comment letter to the FTC, and we. Hired a group called analysis group to actually test the model of the, people who were claiming there was this common, ownership there's, all started, with a paper, I was, posted, on SSRN, it's subsequently, been published, in the, time between SSR, and in publication, they wouldn't release their model so nobody could really test it replicate, it be a hundred percent sure, but. In August they did publish they did put their their data and their model out there so, now that it's been tested it turns out the models not robust, at all and, analysis. Group did the work it's. In our FTC, letter encourage, you to look at it and if, you change, either. Of the variables, just a little on control. Or on financial. Incentive, which are the two variables that make, up the the crux, of the model the. Results, completely go away so, in our letter we also outline, a whole bunch of other issues but even more fundamentally. And I just, gave, before this a two-pager. There's something we have it's called a policy spotlight. And says policy, spotlight, incorrect. Data, it. Turns out they didn't understand, index. Construction. When. A company, goes, bankrupt. It, is delisted, from the exchange. What is delisted, from the exchange, it's, actually, removed, from the index as an, index manager, when, it's not in the index we sell it from the portfolio, so. They say, in their paper and it's just one little sentence you, know we didn't observe there. Were no observe values. During, periods of bankruptcy, so. What did we do, we.
Overrode, The zeros, by taking the last observed, value. And rolling, it forward you, might say all right well that doesn't matter it's just a few data points oh no, this. Is a study on Airlines, in a period where five of the seven airlines, in the study went through bankruptcy. USAir, went through bankruptcy twice it, was, taken, out of the index it, was not put back in until it came out of bankruptcy a second, time four. And a half years. Later. So. You look at the this, two page paper and, you realize you've, taken zeros, and you've put in four or five 6%. For. Periods, of either. Several. Months or several years for. Five out of seven Airlines now. How can that be a good quality paper that. Is the foundational. Paper of the entire common, ownership theory, so. Again we have a resource center on our website about common, ownership you, can see all the challenge papers, you can see lots, of things but people have challenged, the, data the. Model the, methodology. The theory, and forget. The the proposed remedies, are completely. Insane, but. You, know it's out there. Everything. Has, power and, influence governance. It. Must be you as you have some kind of market, power right that they are forced to deal with you that's. How you have power. How. Do you, but then how do we a society. Govern. The way in that Blackrock, chooses to, govern right, we're. A highly, regulated company, right so we're, registered, with the SEC. Each, of our mutual funds we have three major. Mutual, fund families, in the US plus. We have a Bank Trust Company each of those entities has, a Board of Directors many. More independent, directors, than inside, directors, my. Team goes and actually presents, to those boards they look at our voting policies, they, see what. Our engagement, preparers are mean we give, a formal, presentation to, them every, year if we, were doing something that somebody. Thought was not, reasonable. I'm sure they'd bring it up and I'll give an example you know last year we said I think we had a somewhat. Bright line on diversity, we, said if, you don't have to women we're pretty likely to vote, against you on the board and. I, don't remember exactly how we phrased it but certainly that's how it came across and. Yeah we got a lot of feedback, what about. African-americans, and what about Latinos. And what about Asians, and what about all these other categories are you going to create you know a quota system and, fill in a you, know each of these buckets and I thought about and I said you know, what. The way we wrote it it's not really what we meant. What. We really meant is we're looking for diversity, of thought and if, someone came in and and we said well you know we're gonna use this as a flag because it's visible, easy to measure easy to look it tells, us is this a company we want to look at more if. We they got there and they said well here's our five African, Americans and we have no women. Okay. You know I think, we have to look at this more, broadly but, is it a good flag it's a good flag so if you if you took the language of last year and this year and you held them side by side you'd, see we changed the language a little and that was based on feedback so you know these things are living. Documents and they evolve but. We're highly, elated and highly supervised, and people, can also vote with their feet as I said you know the concentration issue there's, a lot of competitors, who would be very happy to have your money, about. A larger. Role of the government through higher. Corporate taxes, more regulations, and do, you think that will be more effective than relying. On business, leaders because for. Example you meant about you. Talked about more, transparency.
Nowadays. With social media I think. For, party. That's true but, still when I get. My gas and, I have to decide between, shower. Shell or Chevron I have, no idea who has, a better pension plan, for their employees those kind of things and secondly I also the the porridge problem, that you mentioned I have, the feeling that it's. For. Companies it's also a trade-off doing. Just enough it's. Also. Doing. Just enough it's not only only about. Has. The highest, societal, benefits but also will. Provide you as a complete company, most olicity etc, so. Isn't. The government shouldn't, the government get a higher role in dealing. With that and, some companies be paying. Higher corporate taxes is that. Well. Those are a lot of different questions I'm. Not sure we have enough time to do all of them I personally. Don't think every. Problem, should be solved, by the government, I, think, that there are private, sector solutions, to a lot of things, you. Know one of the hot issues right now has to do with data, what data our company is providing or not providing. SEC. Chair Clayton. Says you know companies, should disclose material information. That. A reasonable, investor would need to make a decision, we. Agree with that we're. Working with a group called SAS, B we, think it's very industry. Specific, we don't think it's a one-size-fits-all, is, that a good thing for a government, to get involved you know you'd have some government. Task force they'd come up with something, and then it's stuck, how. Does it evolve how does it change you. Know I'm not sure. That that's a great spot for government, to get involved in yet that's being debated right now and Chintan I would, rather see a private-sector, solution where, enough, investors, think, this is important, that. Companies. Voluntarily. Disclose. Things, that, some, do today and some don't so I think it's it's a it's a timely. Question and it's an evolving area. But, I would probably lean a little bit more towards private sector. So. I'd like to thank Barbara for making, the trip out here.