Such is the popularity of CEO letters, famed biographer Walter Isaacson wrote his latest book largely around the letters to stakeholders from former Amazon boss Jeff Bezos. These letters often highlight the direction of the business and the things they find important, with many underlining the commitment of the firm to corporate social responsibility.
Research from the University of Georgia explores how influential these letters are both inside and outside the business. The study found that these letters do indeed not only internal behavior, but also the behavior of firms these companies invest in.
“Institutional investors have always had an influence on the companies in their portfolio, but it’s often in private and behind the scenes,” the researchers explain. “With the rise this decade of ‘Dear CEO’ letters, BlackRock made their demands for changes in corporate strategies public, and we found that their public engagement is associated with changes in disclosure.”
Influencing others
BlackRock was the focus of the study because, with over $9 trillion in assets under management, they are the largest asset manager in the world, with stakes in over 3,000 firms. They started their “Dear CEO” letters in 2012 and have prompted other investment firms to follow suit.
“A lot of these big institutional investors are having these one-on-one conversations in the background with their portfolio firms,” the researchers explain. “Having this private engagement with investors is part of what companies do. What was surprising about the BlackRock letters is that they were coming out with these broadcast statements—essentially saying, ‘Everybody needs to consider these issues, and here are things that you should work on.'”
The early Dear CEO letters urged companies to move away from short-termism and focus instead on long-term growth. They also promoted greater transparency and better corporate governance. Later letters have focused on climate change and investing in the workforce as we adapt to new technologies.
Spreading the word
The researchers used text analysis to explore any link between the letters and the subsequent behavior of recipients. They analyzed all SEC-mandated disclosures from firms in the aftermath of each annual letters’ publishing and compared them with their disclosures prior to the letters coming out. In all, they assessed around 3,500 companies between 2016 and 2019.
The analysis revealed that the letters did indeed appear to be influential, with disclosures becoming 22% more like the content contained in the Dear CEO letters in firms where BlackRock owned a substantial stake.
“What we found is that companies were responding to the letters,” the researchers say. “What they wrote in their disclosures was becoming more like the text in the ‘Dear CEO’ letters.”
The researchers also examined the mandatory lobbying disclosures of each firm to see if their political activity matched the statements in the Dear CEO letters. As with other activity, they found an increase in lobbying expenditure in areas covered in the letters, but interestingly, only in companies that had expressed a degree of support on those issues in the past.
“Our research indicates institutional investors are impacting the disclosures of their portfolio firms through broad-based public engagement, like the ‘Dear CEO’ letters,” the authors conclude. “It will be interesting to see how other investment firms adapt their communication strategies with portfolio firms, especially against a backdrop of an investor base that is increasingly concerned not only with profits but also other factors, such as environmental, social and governance considerations.”
