Asset Stewardship Q1 2020

Figure 1: Vote Summary Q1 2020

The outbreak of the COVID-19 pandemic in March 2020 and its rapid spread is a serious threat not only to global health, but to our communities, our economies and the investment returns people depend on.

In light of these extraordinary circumstances, in a March publication, we shared some perspectives on our asset stewardship agenda for 2020 recognizing that our portfolio companies are going through a difficult time and that their immediate priority is the safety and wellbeing of their employees and other stakeholders.

As a long-term shareholder we assured companies that we stand ready to help them navigate existential financial threats and market volatility, and provide guidance through our stewardship engagements.

We also recognized that our engagement conversations, at least in the short-term, will likely shift from very specific longer-term material sustainability matters to more immediate Environmental, Social and Governance (ESG) issues such as employee health, serving and protecting customers and ensuring the overall safety of supply chains. Companies will also face a delicate balance in determining how to manage their short-term liquidity needs in order to maintain their financial stability. With this in mind we encouraged our portfolio companies to:

• Refrain from undertaking undue risks that are beneficial in the short term but harm longer-term financial stability and the sustainability of the business model;
• Communicate to investors COVID-19’s short- and medium-term potential impact to the business, overall operations and supply chains, including management preparedness and scenario-planning and analysis;
• Articulate how COVID-19 might impact or influence their approach to material ESG issues as part of their long-term business strategy;
• Lastly, to continue to help stop the spread of the virus, we encouraged companies to follow guidance from government authorities to either postpone their shareholder Annual General Meetings (AGMs) or shift to virtual meetings. When conducting an AGM meeting virtually, we expect companies to preserve all the rights and opportunities afforded to shareholders through a physical meeting.
   

Integrating R-Factor Scoring System into our Proxy Voting and Engagement Guidelines

In January 2020, in our annual letter to our portfolio companies, State Street Global Advisors’ CEO Cyrus Taraporevala highlighted our continued focus on ensuring that portfolio companies are adequately managing material sustainability issues. The letter provided guidance designed to help boards of directors prioritize ESG issues within their organizations and outlined the changes to our proxy voting and engagement guidelines on sustainability issues.

At State Street Global Advisors, sustainability has been a focus of our Asset Stewardship program for multiple years. We first called on boards to integrate sustainability into their long-term strategic planning process in 2017, driven by our view that shareholder value is increasingly impacted by issues such as climate change, labor practices, and consumer product safety. Since then we have conducted hundreds of engagements on this topic and have observed that fewer than 25% of portfolio companies we have evaluated have meaningfully identified, incorporated and disclosed material ESG issues into their strategies. In addition, companies are seeking further clarity from investors about which ESG issues they should focus on, how to do so, and how best to communicate their efforts.

Consequently, to address ESG more comprehensively, in 2019, we launched R-FactorTM, a transparent ESG scoring system that measures the performance of a company’s business operations and governance as it relates to financially material and industry-specific ESG issues. Drawing on data from four leading providers and leveraging The Sustainability Accounting Standards Board (SASB) transparent materiality framework, R-FactorTM generates unique ESG scores for over 7,300 listed companies globally and allows us to evaluate a company’s performance against both regional and global industry peers.

By sharing scores directly with portfolio companies and incorporating their score more broadly into our stewardship program, we seek to encourage greater management and disclosure of ESG issues. We believe that doing so is in the best interests of investors and companies alike and with this objective in mind, we will take the following action:

• Beginning with the 2020 proxy season, we will take appropriate voting action against board members at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 30, and CAC 40 indices that are laggards based on their R-Factor scores and that cannot articulate how they plan to improve their score;
  
  
• Starting in 2022, we will expand our voting action to include those companies who have been consistently underperforming their peers on their R-FactorTM scores for multiple years, unless we see meaningful change.

We look forward to partnering with our portfolio companies to continue building more sustainable capital markets. Information for companies wishing to request their score can be found here.

Enhancing our Proxy Voting Guidelines on Board Quality and Composition -2020 Update

Number of Allowable Board Mandates

We have revised our voting guideline on the number of allowable board mandates for companies listed in Australia, Canada, Europe, the UK and the US to better account for the growing time commitment that any given directorship requires. State Street Global Advisors may take voting action against a director in the following circumstances:

• Executive directors (Named Executive Officers in the US) of a public company who sit on more than two public company boards;
• Board chairs or lead independent directors who sit on more than three public company boards;
• Director nominees who sit on more than four public company boards.

Independent Board Leadership

We believe effective independent board leadership is a key component of good corporate governance and long-term value creation. State Street Global Advisors may take voting action against the chair of the nominating committee or its members at S&P 500 and STOXX Europe 600 listed companies that have combined the roles of chair and CEO and have not appointed a lead independent director or an independent deputy chair.

Gender Diversity

We have expanded our gender diversity voting guideline (for details see the Fearless Girl section below) to Hong Kong and Singapore focusing on companies listed on the Strait Times and Hang Seng indices. Further, in markets where we apply a gender diversity voting guideline, we will also vote against the entire nominating and governance committee, not just the chair, at companies where concerns exist about the lack of gender diversity for four consecutive years and the companies are unable to engage in productive dialogue with us. Additional details are provided in the Fearless Girl Campaign section below.

For State Street Global Advisors’ complete 2020 Proxy Voting and Engagement Guidelines, including a summary of material changes, please visit our website: https://www.ssga.com/capabilities/esg/asset-stewardship/asset-stewardship-report-library 

Third Anniversary of Fearless Girl Campaign: Progress Continues

In March 2020, we celebrated the Fearless Girl campaign’s third anniversary and the International Women’s Day by creating a “Living Wall,” which highlighted the number of companies who have added their first female director to their boards since we began our campaign in March 2017. The campaign began with us placing a statue of a girl near Wall Street and calling on companies to have at least one woman on their boards, failing which, we would take voting action against directors on the board. We built on the strong momentum from our efforts in the US, the UK, and Australia in 2017, and expanded our gender diversity voting guideline to Europe, Canada and Japan in 2018.

After three years of productive engagements and voting, we are pleased to report that since the introduction of Fearless Girl in 2017, 681 companies, or approximately 49% of companies identified by State Street Global Advisors, responded to our call by adding a female director.

Figure 4: Impact of Fearless Girl Campaign

More information about our Fearless Girl campaign can be found here.

In January 2020, in order to enhance our Asset Stewardship program, we launched a new web-based Stewardship Platform which centralizes engagement and voting data as well as analytical and reporting capabilities on a single platform. The platform has enabled us to enhance the operational capabilities of the stewardship team, better track the impact and outcome of our engagements, as well as improve the collaboration with active investment teams. In addition, State Street Global Advisors’ R-FactorTM scores have been integrated into the platform to facilitate ESG evaluation and monitoring.

Engagement Highlights

EMEA

During an engagement with Royal Boskalis Westminster NV we provided feedback on the company’s new executive remuneration policy. We expressed concerns with the structure of the Long-Term Incentive Plan (LTIP), suggesting that awards be granted in performance shares rather than in cash to better align executives’ interests with shareholders. Additionally, since share price development is the only performance target used in the LTIP, we encouraged the Chair of the Remuneration Committee to include additional metrics to better align the plan with the company’s long-term strategic objectives. Finally, we encouraged the company to provide more robust disclosure around the performance targets used in the LTIP as in our view the current level of available information is limited.

In response to our feedback the company committed to improve transparency on the targets used and to review the structure of the LTIP.

North America

The first quarter of 2020 experienced a number of significant senior leadership transitions, one of the most high profile of which was the resignation of The Walt Disney Company’s CEO announced on February 25, 2020. State Street Global Advisors engaged with the company to discuss the succession planning process as well as the expectations for the leadership structure and senior management responsibilities moving forward.
In addition, as in previous years, we expressed concerns on the total quantum of CEO pay and the growing reputational risk resulting from this. Consequently, we did not support Disney’s executive compensation at its 2020 AGM as we believe that the board needs to take action in order to mitigate long-term reputational risk stemming from high levels of executive compensation.

Ahead of Apple Inc.’s AGM, we engaged with the company multiple times to discuss the resolution pertaining to "Freedom of Expression and Access to Information Policies". Based on these discussions and analysis of Apple’s current disclosures, peer comparison, and the company’s R-Factor score, we determined that the company's practices could be further strengthened as certain aspects lagged those of peers. During an engagement, State Street Global Advisors encouraged Apple to establish and publish a formal policy statement on human rights. Apple was agreeable to this request and intends to publish a formal statement on human rights with mention of freedom of expression within a year. Given the company’s intent, we submitted an Abstain vote on this proposal.

APAC

Last year we noted that shareholder activist’s campaigns in Japan were shifting from solely focusing on returning capital to shareholders towards also pursuing the opportunity to influence corporate strategy through board representation. After the US, Japan was the most targeted market for shareholder activist campaigns in 2019. We expect this trend to continue into 2020 as we have already seen a number of campaigns take place in the first quarter.
 

Shareholder activists achieved historical success at gaining board representation in 2019, which is partially attributed to their approaches becoming more sophisticated and long-term oriented. We expect directors to have the ability to effectively communicate their long-term strategies to shareholders. Furthermore, we expect boards to be composed of a diverse set of directors with the collective expertise necessary for formulating strategies best suited to maximizing sustainable returns.

State Street Global Advisors’ Comments on Exemptions From the Proxy Rules for Proxy Voting Advice

In January, State Street Global Advisors responded to the Securities and Exchange Commission’s (SEC) request for comment on proposed rules that would impact proxy advisors and their guidance. In our response we supported the SEC’s overall effort to improve the proxy voting process, but also raised concerns with the proposed rules.

In addition, in response to a proposal that companies be able to review proxy advisor reports prior to them being sent to investors, we noted that we have not seen evidence that a mandated review is necessary. However, we also noted that if such a review was mandated, it should be limited to a single review of the facts and data in the report and that investors should receive the draft report at the same time as the company. We also suggested that proxy advisors should not be mandated to include links to company responses in their reports, nor should companies have access to any custom research or recommendations produced for proxy advisor’s clients.

Finally, in our view, while the proposals address certain aspects of proxy voting and are an important step in improving the proxy voting process, they do not address the core proxy plumbing issues, and, presumably, assume accurate recording of vote results. Therefore, we urged the Commission to move quickly to address plumbing and vote accuracy issues as well. We believe such reforms should include, at minimum, end-to-end vote confirmation and completion of the universal proxy rule, which would significantly reduce complexity when voting contested elections. State Street Global Advisors will continue to monitor proposed rules regarding the proxy voting process.

Drafted Revisions to the Principles for Responsible Institutional Investors, Japan’s Stewardship Code

In Q1 2020, we submitted a comment letter on the drafted revisions to the Principles for Responsible Institutional Investors, Japan’s Stewardship Code. We expressed our support of the Revision Draft as it appropriately identifies ESG factors as financially material drivers of long-term performance and encourages asset managers to integrate ESG into the investment process. Additionally, it promotes asset managers to effectively conduct their stewardship activities through voting, engagement, and reporting.
 

Our clients are the world’s governments, institutions and financial advisors. To help them achieve their financial goals, we live our guiding principles each and every day:

• Start with rigor
• Build from breadth
• Invest as stewards
• Invent the future

For four decades, these principles have helped us be the quiet power in a tumultuous investing world. Helping millions of people secure their financial futures. This takes each of our employees in 27 offices around the world, and a firm-wide conviction that we can always do it better. As a result, we are the world’s third-largest asset manager, with US $2.69 trillion* under our care.

* AUM reflects approximately $50.01 billion USD (as of March 31, 2020), with respect to which State Street Global Advisors Funds Distributors, LLC (SSGA FD) serves as marketing agent; SSGA FD and State Street Global Advisors are affiliated.