Better Ways of Promoting Corporate Leadership: Stewardship

How a Fearless Girl Is Changing the Way Companies Think about Performance

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

You may expect to find a famous actor or star athlete causing the photo frenzy, but if you make your way to the center of the action, the celebrity in the middle of the melee turns out to be a 50-inch bronze statue: Fearless Girl. Designed by sculptor Kristen Visbal and recently placed by State Street in the heart of New York’s financial district, the work is intended to represent the power and potential of women in leadership. And in the waning weeks of winter, Fearless Girl has 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’s 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 manager 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 the asset manager’s efforts aren’t about imposing a set of morals, but rather driving long-term value creation. 

“Index providers like State Street,” Rakhi says, “don’t have the luxury of selling companies we 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 became the large institutional investor to vote against management of several portfolio companies on issues of climate change.

With Fearless Girl, State Street 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 describes 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. It was a perfect example of unconscious bias,” she says. 

The same report delivered the surprising conclusion that male executives themselves find 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. “They were taken aback,” Rakhi says, “at how much adding women to the board affected the substantive outcomes of corporate decision-making.” 

The implication was unmistakable. “What these reports told us,” Rakhi says simply, “was that one of the underlying problems at 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 has a problem of her own: with a lean 12-person team, there is no way she can effectively engage each and every one of the 10,000 companies State Street invests in on gender diversity issues. “Even if we had a team three times as big, trying to tackle this issue with every company is 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 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 State Street assets under management,” Rakhi says.

Eventually, the team settles 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 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 became the first large US asset manager to announce that it would vote against a board’s nominating or governance committees if that company has no women on its boards and fails to commit to increasing gender diversity. As they did the year before when they began pushing companies to act on climate change, State Street 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. How did they react? Most engagements have been positive. But not all. 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 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, 116 companies have now added a woman to their board and 36 more have committed to taking steps to improve gender diversity in the coming year. Perhaps the most constructive was with a real estate investment trust in Houston. Rakhi beams, “They wrote us a letter informing us that they had added a women to their board and that our input had helped shape their board refreshment process and discussions.”

Most, however, require 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 percentage 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 State Street in these efforts? “We’re already starting to see growing momentum,” says Rakhi. “Since our announcement in March 2017, asset owners and managers representing $15 trillion in investible assets have spoken up on this issue and indicated they’ll also be pushing to advance gender diversity. That’s very encouraging.”

And State Street 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 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% of startups. 

With the expansion of the gender voting guidelines to Japan and Canada, State Street 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.

1Lee, Linda Eling, et al. Women on Boards: Global Trends in Gender Diversity on Corporate Boards, MSCI, November 2015. Accessed on February 17, 2016. MSCI defined companies without a critical mass of women at the top as companies with less than three women on their board of directors or a lower percentage of women than the average in the company’s country. The methodology used in MSCI’s study is different than that of the index, and as such, the results of the study should not be viewed as indicative of future performance of any State Street Global Advisors product. Return on equity is not representative of the performance of any investment or the potential return of any ETF


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Expiration Date: 2/28/2019