Reinventing Shareholder Activism: Stewardship

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It was an otherwise dreary March morning in Lower Manhattan. Temperatures were below freezing, the sky was overcast and pedestrians were avoiding remnants of a recent snowfall piled onto street corners as they dodged taxis and buses speeding past. Yet at the intersection of Broadway and Morris, there was a commotion. Hundreds of tourists, many of them young girls, were jammed onto a small, triangular plaza posing for selfies in the bitter cold.

You may have expected to find a famous actor or star athlete causing the photo frenzy, but the celebrity in the middle of the melee turned out to be a 50-inch bronze statue: Fearless Girl. Designed by sculptor Kristen Visbal and placed by State Street Global Advisors in the heart of New York’s Financial District, the work was intended to represent the power and potential of women in leadership. And in the waning weeks of winter, Fearless Girl had become an international viral sensation, sending a jolt across the globe.

Long-Term Ownership, Strong Board Leadership

Back in Boston, Rakhi Kumar is fearless in her own right. In 2017 she was named to the Boston Business Journal Power 50 list and honored with an Abigail Adams Award for her leadership of State Street Global Advisors’ efforts to push companies to add more women to their boards, and she’s been the driving force behind the new gender diversity guidance the investment management firm issued on the day that Fearless Girl was announced. Backed by research showing that companies with women in leadership perform better than those without,1 Rakhi insists that the asset manager’s efforts aren’t about imposing a set of morals, but rather about driving long-term value creation.

“Unlike their active manager colleagues,” Rakhi says, “index portfolio managers don’t have the luxury of selling companies they think are adding risk to the portfolio. If a company is in the index, we own it. So our job is to identify areas of concern or opportunity, and help companies to act on them. We do that through a constructive engagement process: When companies fail to take action we will use our proxy voting power to bring about change.” Indeed, in 2016, State Street Global Advisors became the largest institutional investor to vote against the management of several portfolio companies on issues of climate change.

With Fearless Girl, State Street Global Advisors wasn’t looking to make a social statement. “Our focus was on good corporate governance, which data shows is closely linked to strong, effective and independent board leadership,” says Rakhi. “That means board directors must have relevant background and experience, the ability to effectively influence decision-making, and not be captive to management. So we started there.”

The team started examining the studies indicating that gender diversity on boards is linked to company performance. Rakhi points to a Conference Board study that described how executives in France all came from the same elite set of schools, universities and professional networks. The end result, not surprisingly, was that board candidates outside of that exclusive circle weren’t even considered. A likely unintended consequence was that women were largely excluded. “When the results of the study were released, the executives were shocked. Most of them had no idea this was even a problem or how much adding women to the board affected the substantive outcomes of corporate decision-making. It was a perfect example of unconscious bias,” she says.

The same report delivered the surprising conclusion that male executives themselves agree that having women on boards improves board quality, helping them ask new questions, raise new points for discussion, focus more on risk management and reduce groupthink.

The implication was unmistakable. “What these reports told us,” Rakhi says simply, “was that one of the underlying problems with corporate boards was a lack of gender diversity.” As a result, in their ongoing effort to improve board quality and effectiveness, Rakhi’s Asset Stewardship team zeroed in on trying to get companies in the firm’s investment portfolio to add at least one woman to the board.

Tackling Gender Diversity at Scale

But Rakhi had a problem of her own: It would be difficult for any investment manager to effectively engage on gender diversity issues with each and every one of the 10,000 companies State Street Global Advisors invests in. “Even if we had a team three times as big, trying to tackle this issue with every company was not going to yield results,” she says, “It was more important to be smart about the screening process, determining which companies to target and finding a meaningful way to engage.” Rakhi knew it was important to screen a mix of sectors and company sizes. “We wanted to engage large companies to help them with these issues, because they could share these lessons with smaller companies,” Rakhi says. “But at the same time, we knew some smaller companies might approach these issues more effectively.”

The team also looked to focus initially on geographies where there was ample opportunity for improvement. And, lastly, they wanted to target companies that made up a significant portion of the firm’s investment portfolio — where there was potential to have a positive impact on long-term value for clients. “If the whole point is to safeguard assets owned by our clients, we needed a sample that represented a good chunk of our assets under management,” Rakhi says.

Eventually, the team settled on the Russell 3000, FTSE 350 and ASX 300 indexes. “When we looked at data for the Russell 3000, for example,” Rakhi says, “we saw that about a quarter of the companies didn’t have women on their boards — around 650 companies in all. Engaging those companies felt achievable but, as importantly, meaningful in terms of risk to the portfolio.”

Using Their Voice and Vote

In 2017, State Street Global Advisors became the first large US asset manager to announce that it would vote against a board’s nominating or governance committees if that company had no women on its boards and failed to commit to increasing gender diversity. As they did the year before when they began pushing companies to act on climate change, State Street Global Advisors accompanied notice of the new voting guidelines with detailed gender diversity guidance to help companies take action.

Then came the hard part: The team reached out to more than 700 companies they flagged for having no women on their boards. Most engagements were positive. But not all. And some companies were a little panicked, Rakhi says. “We heard from one: ‘We didn’t know people cared about this.’ Another seemed inconvenienced and said, ‘So you want a woman? We’ll give you a woman.’ They didn’t get it. We weren’t trying to get these companies to add women to their boards for the sake of it — but to understand why having those diverse perspectives is important to their companies and to us as shareholders.”

In all, State Street Global Advisors took voting action against more than 500 companies in the 2017 proxy season, but it’s the constructive engagements that Rakhi is most proud of. Since the guidance was issued, 152 companies have added a woman to their board and 34 more have committed to taking steps to improve gender diversity. Perhaps the most constructive outcome was with a real estate investment trust in Houston. Rakhi beams, “They wrote us a letter informing us that they had added a woman to their board and that our input had helped shape their board refreshment process and discussions.”

Most, however, required more finesse. Typically, says Caitlin McSherry, an analyst in Rakhi’s group, the team starts by trying to understand how companies view diversity. “First, we raise the diversity issue with them and gauge whether they’re open to discussing it. If so, we try to find out whether they keep diversity metrics such as the percentages of new hires, managers and executives, and, if they do, what they do with the data.”

The resulting conversations are often positive, Caitlin says. “One life sciences company with no women on their board currently called and told us they’d had an independent chairwoman on their board for many years who recently retired. They hadn’t yet added another woman but they were able to articulate how the company values diversity and how the woman who had been on the board was able to bring diverse perspectives and value. We’re not going to vote against a company in an instance like that.”

The Future of Asset Stewardship

Will other asset managers join these efforts? “We’re already starting to see growing momentum,” says Rakhi. “Since our announcement in March 2017, asset owners and managers representing US$13 trillion in investible assets have joined us in speaking up on this issue and indicated they’ll also be pushing to advance gender diversity. That’s very encouraging.”

And State Street Global Advisors isn’t letting up. The next stops on the Fearless Girl tour are Japan and Canada, where the asset stewardship team found surprisingly strong challenges to board diversity. “More than half of TOPIX 500 companies don’t have a single woman on their boards,” Rakhi says, noting that Japanese Prime Minister Shinzo Abe has made the issue of diversity a key plank of his economic agenda. Closer to home, Canada, despite its progressive reputation, isn’t much better, with four in 10 companies lacking gender-diverse boards, including 80 percent of start-ups.

With the expansion of the gender voting guidelines to Japan and Canada, State Street Global Advisors aims to engage with an additional 1,700 companies in 2018. “Ultimately,” Rakhi says, “this is about the journey — both ours as an asset manager identifying risks to long-term value, and the companies in our portfolio acting to take them seriously. We just have to be tenacious.” Fearless, even.