27 Jun ESG, Stakeholders, and Corporate Planning
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
On the Importance of Honest Stakeholder Analysis
In his 2021 letter to CEOs, Larry Fink, himself the CEO of BlackRock, the world’s largest asset manager, warned that life on earth was desperately imperiled by climate change and insisted that fighting it was among his and his firm’s top priorities. He wrote:
In the past year, people have seen the mounting physical toll of climate change in fires, droughts, flooding and hurricanes. They have begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. They are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner. No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day….
It’s important to recognize that net zero demands a transformation of the entire economy. Scientists agree that in order to meet the Paris Agreement goal of containing global warming to “well below 2 degrees above pre-industrial averages” by 2100, human-produced emissions need to decline by 8-10% annually between 2020 and 2050 and achieve “net zero” by mid-century. The economy today remains highly dependent on fossil fuels, as is reflected in the carbon intensity of large indexes like the S&P 500 or the MSCI World, which are currently on trajectories substantially over 3ºC.2
That means a successful transition – one that is just, equitable, and protects people’s livelihoods – will require both technological innovation and planning over decades.
This is fascinating reading in retrospect. Not only was Fink wrong about the long-term outlooks for business, investments, and energy, but he was also wrong about the short-term outlooks for the same. More to the point, the reasons he was wrong are both telling and cautionary.
The keys to understanding what Fink missed here can be found in the last two sentences of the first paragraph above, as well as the last sentence of the third paragraph. For the sake of clarity, I’ll start today with that last bit.
Fink notes here that it is important for companies to “plan” for the future. Indeed, he talks a great deal in this letter about “planning.” He also talks a great deal in this letter about “stakeholders” and how best to serve them, using the term more than a dozen times. What he may not understand – or may misunderstand – is that “planning” and “stakeholders” are intimately related terms in the history of business theory and practice.
In 1962, when business theory was young and business practices were mostly scattershot, a man named Robert Stewart, a former corporate planner for Lockheed, gathered a team of researchers at the Stanford Research Institute (SRI) in Menlo Park, California. The name of the program he ran was the “Theory and Practice of Planning” program (or TAPP, for short). Over the course of their research, Stewart’s team attempted to resolve the “Planning Paradox, which, put simply, is that “planning is necessary and important but is hardly sufficient for business success; rigid adherence to prior plans can cause businesses to miss opportunities and engage in poor decision-making. I note the evolution of their research as follows in The Dictatorship of Woke Capital:
In 1963, TAPP issued its first report, “A Framework For Business Planning,” which not only became the foundational blueprint for the work that the group would conduct over the next decade, but also introduced some of the most important concepts in business management since Taylor’s work a half-century earlier. Among the concepts developed by TAPP and introduced remedially in this report was a decision-matrix and an analytical method named for and using the variables mentioned above—strengths, weaknesses, opportunities, and threats—which came to be known by the acronym “SWOT.”2
While SWOT is a methodological idea developed in the broader epistemological framework of strategic planning, a second concept, a sub-category of strategic planning, in which the SWOT technique would be applied by Stewart and TAPP, was something they called “stakeholder” planning, a term coined by team member Marion Doscher. The idea was to chart the course of the company, to plan strategically by analyzing input on strengths, weaknesses, opportunities, and threats from a variety of “stakeholder” groups, each of which would have a different interest in the company—shareholders, customers, employees, managers, unions, and so on. A logical and natural extension of the idea of strategic planning, stakeholder analysis was intended to force managers and executives to see how their decisions affected different groups and how best to handle an array of often conflicting and competing interests. The idea—which seems entirely commonsensical in retrospect—was that it would be difficult, if not impossible, to plan effectively for the future without knowing what customers, employees, and others might need and want in the future.
The point here is that effective strategic planning is not easy. It is extremely complicated and is based on assessments that can and do change over time. In order for planning to work and to be valuable, these assessments must be done rigorously and honestly. Stakeholders and their needs must be evaluated as objectively and frequently as possible.
Circling back, in his letter, Fink tells CEOs that his clients care about climate change more than anything else. “No issue ranks higher,” he writes. This is hardly an honest evaluation. One suspects that if BlackRock’s clients cared more about climate change than any other issue, they would not be investing their surplus savings in various exchange-traded funds and instead, would either be donating it to organizations that are actively engaged in climate change mitigation, or at the very least, would be investing it in more aggressively and openly socially motivated investment vehicles.
It is ironic, then, that in a letter in which he scolds the CEOs of the businesses whose stock his company holds about their planning, Larry Fink makes one of the most serious and destructive planning errors one can make. He substitutes his own beliefs and vision for those of his clients and evaluates his stakeholders using a normative model rather than the objective model required for successful strategic forecasting.
To Fink’s credit, he is more a businessman than a dogmatist, and (as I have noted previously), has already come to the realization that his 2021 proclamations about the importance of climate change and the energy transition to BlackRock’s long-range planning are incompatible with his and his stakeholders’ short-term goals. He wants to make money and for BlackRock to be relevant in the future. They want to make a solid return on investment and be comfortable in their retirements. And while Fink still talks a good game about climate and the rest, he understands that his and stakeholders’ futures are dependent less on climate mitigation and more on embracing the technologies and innovations that will create the future, including AI and cryptocurrency, both of which are exceptionally energy intensive.
For the record, BlackRock is not the only climate-crusading passive giant to have realized that its long-range planning was based on subjective values rather than objective stakeholder needs. Just yesterday, State Street announced that it is partnering with Galaxy Asset Management to launch a new Bitcoin/crypto/digital asset ETF products. It will not be the last.
ESG and related strategies were always based less on honest and rigorous stakeholder evaluations and more on the substitution of subjective and politicized value judgments for objective assessments. It is no wonder, given this, that their appeals to “planning” and long-range strategic agenda-setting have failed miserably. By lying – mostly to themselves – the advocates of ESG missed the proverbial forest for the trees and nearly missed the reality of short-term business needs by focusing instead on prejudiced long-term fantasies.
