How to profit from good business

Here’s a story that should interest Larry Fink, the BlackRock chief, who is stirring up such a stink with his call on business leaders to do more than just make profits.

The tale comes from when I had lunch with Andy Street, while he was still running the John Lewis stores. When our food arrived – big plates piled high with sizzling sea bass – Street let out a huge roar of laughter, exclaiming: “So much fish. We’ll never make a profit selling portions like that.” The poor waitress was totally thrown, explaining that these were the chef’s usual portions.

Then Street laughed some more, saying that he had been joking. Of course he wasn’t joking at all. But he also knew that the public might not want to hear the boss of the saintly John Lewis – admired by all for its enlightened co-ownership philosophy – expouse what might seem to them a dirty word.

There are two observations to make from Street’s light-hearted jest. First, it was refreshing to hear so directly from Street, who is now the Conservative Mayor of Birmingham, that John Lewis, and it’s sister group, Waitrose, and their 70,000 partners in the business, do not consider profit to be frowned upon.

Second, the fact that Street needed to say his remark was a joke was a rather sad indictment of how business is perceived today, and that he felt mentioning profit would be off-putting to the public.

Yet JLP has been making excellent profits ever since the employee-owned business was launched back in 1929. It was precisely to avoid the injustice of crony capitalism or Bolshevik communism that the founder, John Spedan Lewis, set up the new ownership model in the hope of finding a business model structure which was fair. This is what he said: “The present state of affairs is really a perversion of the proper working of capitalism. It is all wrong to have millionaires before you have ceased to have slums.”

Since then, the John Lewis Partnership has shown admirably that making a profit and running a decent business, one which spreads its rewards fairly among staff, are neither incompatible nor impossible to achieve.

It’s also fair to say that the JLP could not have achieved what it has done if it had investors such as BlackRock sitting as one of its shareholders, demanding ever higher and higher returns?

The big question to ask is whether Fink and BlackRock can help companies create that delicate balance between profit and fairness that John Lewis has done within the current structure of publicly-listed companies owned by remote institutional investors.

While Fink is not in the same league as the inspirational Lewis, well, not yet, his intervention suggests that a similar vein of thinking has informed his warning to the world’s most powerful chief executives to think beyond the bottom line.

This is what he wrote to them: “The time has come for a new model of shareholder engagement — one that strengthens and deepens communication between shareholders and the companies that they own” … and to serve a social purpose that benefits all society.

Fink has the power to make them think too: BlackRock manages $6 trillion of investments in a host of companies in the US, the UK, Germany and France, either through exchange-traded funds or mutual funds.

As you would expect, Fink’s missive is causing a few ripples as CEOs and other investors are hitting back, demanding to know what he means by his warning which comes down to, be good or else.

The BlackRock chief says he wants the companies he invests in to benefit all stakeholders, including shareholders, employees, customers and the communities in which they operate.

But he has not yet spelt out what he means by this, other than to say companies should be looking at their impact on automation and climate change and other areas os social responsibility.

They may not know the detail yet but CEOs are certainly paying attention, particularly in the US where, according to Bloomberg, one of every three dollars investors send to fund companies gets invested by BlackRock.

However, there is a problem with Fink’s warning, and it could be that his own BlackRock asset manager may be part of the problem. In the main, BlackRock is a passive investor which means that its investments track the market indices such as the S&P 500. So it’s no surprise that Fink is being criticised as being ‘extraordinarily hypocritical’ by some of the US’s top businessmen, those such as property magnate, Sam Zell,who argues that Fink has to decide whether BlackRock is a passive fund that follows the market, or an activist leader who sets the tone by taking direct involvement in a company’s affairs.

It’s a good question.

To date, BlackRock has taken the passive route, and has done little to put pressure on companies in which they invest and where they do not like certain behaviours or policies unlike activist investors.

It may well be that following Fink’s latest intervention, BlackRock will switch into a more active role and take on management to pursue different strategies. It already has $1.7 trillion in active funds and Fink has said that it “can choose to sell the securities of a company if we are doubtful about its strategic direction or long-term growth.”

It has already been more active in demanding that Exxon, the oil giant, should be more open about the impact of its climate change policies on the environment, and says the asset manager will be taking a more proactive role in casting proxy votes at annual meetings on issues from pay to sustainability.

It’s going to be interesting to watch how Fink distinguishes between good and bad behaviour – and, more pertinently, what the consequences will be for companies that do not fit into his new code of conduct.

This is not a new debate. The interplay between making profit and acting with responsibility towards a broader society is as old as the hills. But it has never been more timely nor more important with a young generation now supposedly more fearful of capitalism than of state-controlled socialism.

Fink may not have all the answer but should be applauded for stirring up the debate in such a forthright manner. He should also take time to have lunch with Street in Birmingham, and find out those secrets first-hand.