Every year, executives around the world gather at the World Economic Forum in Davos, Switzerland. This year, "Larry's Letter" by Blackrock CEO Larry Fink is making headlines at the week-long event. In a guest blog post, Caterina Bulgarella explores the implications of Fink's call to action.
The KPIs we evoke to define business excellence in the 21st century are shifting. Seldom does one company top the lists of best places to work, most effective CEOs, most ethical, and fastest growing. Organizations in the past could afford one stand out metric, but today's evolving economic environment requires an uncompromising approach to excellence. The complex risk posture of culture deepens the consequences of a business afflicted with tunnel vision.
Corporate failures of the past ten years reveal both unawareness and erroneous calculus. The choice to separate culture from execution, and culture from risk management, proved costly for organizations like Volkswagen, Wells Fargo, Lehman, BP, and others. Though these companies were not inherently flawed, the size of their ambitions far exceeded real capabilities; the C-suite overlooked the social fabric of their organization and strategized in a vacuum, without properly factoring the role of discretionary behavior, systemic inertia, and stakeholder expectations.
Larry Fink's January 2018 CEO call to action, informally referenced as "Larry's Letter" at the recent World Economic Forum in Davos, qualifies this new breed of risk both companies and CEOs face today. Asymmetries in resources and opportunities, paired with profound and constant change, cause a "paradox of high returns and high anxiety." Owing to this growing gap, not only is there widening misalignment across stakeholder groups, but the opportunity for productive synergies is rapidly diminishing.
What's most compelling about Fink's letter is not the argument about social responsibility, but the underlying economic rationale from which it stems. The risk of increasing diseconomies and decreasing growth is looming larger and larger. This is why companies need to redefine how they think about excellence. The BlackRock CEO's call to action entails tangible requirements, starting with fully integrating the very complexity of today's environment into strategy design.
Fink offers CEOs five very specific recommendations:
- Companies should show how they are contributing to society.
- They should have a clear and public strategy about long-term growth.
- Not only should their strategy be reviewed by the board of directors, but the company should also demonstrate understanding of the societal impact the business will have.
- They should seek and use the insights of various stakeholder groups.
- Boards should help companies achieve a clear vision of the type of social contributions they can make.
It was widely reported that Fink's letter dominated conversations in Davos. Indeed, the change purported in the message is too profound for it to be received without resistance. Instead of proclaiming sudden allegiance to a socially responsible model, it is likely business will struggle with the idea of adjusting their aim and expanding accountabilities. Companies may need time to explore the limitations of their current approaches and completely understand the consequences of what they do. And senior leaders may hesitate to review their commitments and more deeply connect with their aspirations.
An honest and genuine transformative process will require some degree of tension, but eventually cause an organization to become fully aware of its own contradictions. This type of inward clarity paves the way to an honest vision of the shifts needed to embrace a new model of excellence.
A well thought out culture framework can assist senior leaders in apprising their business's priorities, assets and capacities, as well as loftier goals. Once these insights become available, strategizing no longer happens in a vacuum but expresses a new level of foresight. The opportunity for change and purpose mostly resides in existing discrepancies.
As noted by Fink, companies should be socially responsible (and ethical) because they have the assets and resources to play a significant role in society. The issue is not whether business can contribute in a larger way, or what costs it may experience if it does, but what contributions it should pursue. Organizations must include all stakeholder groups in their planning. They must stretch their time horizon into the medium and long term timespans. And they must develop full view of the hidden and intangible impacts of their business. It's not just about the next quarter, nor does it stop at shareholder returns.
Helping organizations figure out the gaps between their practices and aspirations in an essential part of crystallizing their purpose. Hidden is that space is the key to excellence.