In his annual letter to CEOs, Laurence Fink, the chairman and CEO of BlackRock, which manages nearly $US6.3 trillion ($7.9 trillion) in investments, put CEOs on high alert that they would be expected to answer questions about their long-term strategy, what role they play in their communities and whether they are creating a diverse workforce that is being retrained for opportunities in a more automated future.

"Society is demanding that companies, both public and private, serve a social purpose," Fink wrote in his letter. "To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society."

Fink's letter used stronger language, experts said, than his recent annual letters to CEOs, which have focused on long-term strategies and the environmental, social and governance practices (often called "ESG" factors) of the companies in which they invest.

In this year's letter, Fink said he would double the size of BlackRock's team that engages with companies to try to get them to do more on such issues.

"We are seeing a paradox of high returns and high anxiety," Fink wrote, expressing concern about income inequality, infrastructure and automation.

"Since the financial crisis, those with capital have reaped enormous benefits. At the same time, many individuals across the world are facing a combination of low rates, low wage growth and inadequate retirement systems."

He noted the growing expectation that the private sector play a role in resolving concerns, writing that "we also see many governments failing to prepare for the future."

The letter comes amid a greater recognition in corporate boardrooms and money management offices about the importance of issues like climate change, leadership diversity and income inequality for the long-term health of the bottom lines of companies.

One recent survey by the investment consulting firm Callan found that just 39 per cent of investors said the payoff for considering ESG issues in investment decisions was unclear, down from 63 per cent in 2016. Once the domain of socially responsible mutual funds or a major focus of activist pension funds, such factors have grabbed the attention of a broader array of shareholders as they evaluate where to invest.

"We used to talk about 'social investing,' which made it sound like we were talking about a debutante pavillion," said Nell Minow, vice chair of the ValueEdge Advisors. Now, Minow said, as such issues have gotten new vocabulary and focus from more investors - and as the government is increasingly rolling back its involvement in issues like climate change - there's a greater expectation that private sectors pick up the slack.

"It's a mistake to think there's any tradeoff here between financial returns and social goals. All of this is very much factored in to making sure that the company makes money."

The powerful money manager's letter could be a watershed moment amid rising pressure on company boards by activist investors.

"Passive" investments such as index funds or exchange traded funds allocate investments to an entire market index or industry. Unlike managers of actively managed funds, where managers buy and sell stocks, passive money managers are not able to sell the shares of companies with which they disagree. (Some $US4.5 trillion of BlackRock's $US6.3 trillion in assets under management are passively managed.)

But they can vote their shares against negligent directors, hold meetings with board members to discuss their disagreements, and vote their shares on investor proposals that aim to change other practices, such as outsized CEO compensation or a company's environmental policies.

The presumption is that Fink's letter could open the door for BlackRock - and other big money managers - to more frequently vote against management's wishes when shareholders push for such changes if discussions don't produce the needed results.

Siding with management?

In the past, BlackRock and others have been criticised for siding largely with management; according to data reported by Morningstar, the investment giant voted with management of US companies 91 per cent of the time over the past three years.

One pension fund put BlackRock on a "watch list" a year ago for what it called its "reticence to oppose management" and "inconsistency between their proxy voting record with their policies and public pronouncements."

(A BlackRock spokesman declined to comment on that criticism but said in an emailed statement that "we are willing to be patient with companies when our engagement affirms they are working to address our concerns" but that if no progress is seen, "we will vote against management.")

Yet in 2017, BlackRock, along with other big money managers, sided with shareholders for the first time on proposals about gender diversity on the board and others related to climate change.

One of those instances was at ExxonMobil, where it cast its shares this year against the oil giant on a measure instructing the company to disclose more on its climate change efforts.

Clout to force change

Some observers raised questions about Fink's letter.

Charles Elson, the director of a corporate governance centre at the University of Delaware, asked how BlackRock would measure the concept of societal good: "What kind of metric do you come up with, and how do you act on that metric? And what happens if that metric affects long term value to the negative?"

The impact of the letter will depend, of course, on how much "muscle" BlackRock puts behind the letter's demands, Minow said. If it holds managers accountable, and votes when it needs to against proposals, its heft and influence could create real change.

"If you've got like 5, 10 or 15 per cent of the holdings, [management] is going to pay attention," said David Larcker, a professor at the Rock Center for Corporate Governance at Stanford University.

" They're not going to blow it off when an investor like that comes forward. It ratchets up the debate to a very serious level."

The Washington Post