State Street’s diversity push hits the road

In March this year SSGA issued guidance to the more than 3,500 companies it invests in across the US, the UK and Australia, designed to increase the number of women on corporate boards. What has been the reaction from issuers during your engagement activities?

The whole Fearless Girl campaign was backed by a call to action that companies should be enhancing board quality by increasing diversity on their board – diversity of thought and background. What we’ve done since [then] is start screening out companies that have no women on [their] board and start both engaging with them and using our voice – which is engagement and the vote – to try to effect change.

So we sent letters to more than 600 companies and we proactively reached out to companies over a period of time when we weren’t sure whether the letters had reached them yet. We’ve engaged with a bunch of companies [and] we’ve received commitments from about 42 of them so far to enhance diversity on their board.

We screened approximately 470 companies in total and ended up voting against 400 of them – as in, we voted against a director on a nominating or governance committee, either the chairperson or the longest-serving director on the board who was up for election, because of classified board structures on staggered boards.

Had the 400 companies you voted against not responded at all?

Some of them may have. For example, there was one company we engaged with – it was a grocery chain, a very small company. It was required to have three directors, and it had three directors who were all men. The firm made it very clear that it didn’t have a need for another director at this point and it didn’t have any budget to add one, either. In that instance, the company didn’t respond to our call to action, nor was it going to prioritize it – it felt it was not an issue for the firm.

An example where [we were] successful is a company we had screened out that used to have a female independent chair, but that person had retired or left the board. The company spoke about how beneficial it was to have her [on the board], and mentioned that it was looking for a candidate. It also said it was very aware of this [issue] and was going to respond to our call to action as it was thinking of doing this anyway.

In another successful engagement, a company we had screened out recognized that it needed to do something and changed governance policies and practices publicly to say that it was going to prioritize getting diversity on the board.

So the company hadn’t done anything by that stage in terms of making appointments but it said it was going to – and therefore you wouldn’t vote against it?

Right. We don’t believe in tokenism. We don’t want the companies to say, ‘Oh, we need a female director? I’ll find one and put her on the board tomorrow.’ The purpose is to get good quality on the board – we believe directors should fit the bill [and have] the skills you’re looking for. We just find it hard to believe there is no woman out there who fits that bill. If you’re only looking for a CEO, then you might have a problem, but do you always need all your directors to be CEOs?

When you had direct engagement with companies, what was their response to the new guidance? 

We don’t go in with a ‘gotcha’ mentality. We’re very transparent about our point of view, and our point of view is not that this is one size fits all. We would like to talk to you about whether our point of view is applicable to your company or not.

Along with the Fearless Girl campaign, we have put out a point of view about strong, effective board leadership, incorporating sustainable and long-term strategy. All these points of view are very principles-based and they serve as the grounds for papers we send out to companies [so] they know where we are coming from [and] understand some of the issues we are going to raise.

That all helps guide the conversation and means we don’t have to spend a lot of time explaining our viewpoint, so we can spend more time talking about whether this applies to you – and if it doesn’t, then why doesn’t it? Let’s listen and try to understand if there is a unique situation.

For example, there was one company where we asked, ‘How do you think about diversity?’ and it said, ‘Look, we don’t have gender diversity – but we definitely have racial diversity and we have geographic diversity with people from outside the US.’

Have you drawn any lessons from this year’s proxy season on how to approach your side of shareholder engagement in the future?

I don’t think so; we’ve been doing this style of engagement for three or four years. Last year we put out a paper on climate change that helped guide conversations with companies on shareholder resolutions. We’re just about to put out a paper specifically on climate issues that will help guide our conversations during 2018.

I always talk about passive or index investing as like being stuck in a marriage without the option of divorce. The way you set your relationship with the company – the other partner in this exercise – is that you can go in and say, ‘You did this right or you did this wrong,’ and the outcome [will be one thing]. Or you can go in and say, ‘Honey, we have a problem, let’s talk’, and the outcome is going to be very different. And that’s the culture we have internally.

When we put out a point of view we’re not trying to argue – we’re trying to listen. A very important part of engagement with companies is listening and then putting what they’re saying in the context of your point of view. That helps either them to see it from your perspective or you to see it from their perspective – and sometimes you have to agree to disagree.

The other thing is that when you use your vote, you have to reset the relationship sometimes. We’ve had cases where we’ve given [a firm] a few years, it’s not worked, we’ve voted against it, that’s created a little bit of tension and then you go back and say, ‘We still have to talk to each other, we’re in this marriage where divorce isn’t an option.’

What are some of the better practices you’re seeing in terms of issuers’ shareholder engagement?

I like having conversations outside proxy season. When it comes to solicitation, it becomes very much about a vote and not about a broader approach to ESG. I find it very helpful to have a conversation with a director. I want to understand from your board how it is overseeing risk. I don’t want to be micromanaging that risk – I want to have delegated oversight to the board through my vote. That’s why we like to have conversations with directors.

The other thing is that we don’t need to talk to them every year. There are some companies we may want to talk to every year but, as an index investor that is more long term, if we feel comfortable with you it’s fine for me not to talk to you for two or three years. There are some companies that keep asking, ‘Would you like to talk to us?’ and I’ve said, ‘You do know you’re one of 10,000 companies in the portfolio, right? It’s not that you’re not important, I’m not saying no. But I just told you everything I have to tell you.’

I think companies need to get used to the fact that an active manager and an index manager are going to have very different approaches to stewardship. I find it helpful when companies let us know they can be reached and they will be responsive if we want to reach them, and then from time to time, maybe once a year, touch base and say, ‘Would you like an interview?’

We’re open to phone calls, too, if I’ve already met you in person.

Are companies learning and getting better at engagement?

There are more directors willing to come in for conversations. I have had directors actually enjoy conversations then say they want to do it every year. By and large I’ve seen [them] being more open [to talking] – and that’s good.

What would be very helpful is to have clear agendas. What becomes exhausting is [companies saying], ‘Oh let’s touch base. Here is our governance – it’s the same as last year.’ It’s good to have an agenda and recognize that governance doesn’t change overnight, and you don’t want it to be changing overnight.