Dear Board Chair,
As a long-term investor in more than 10,000 public companies across the world, State Street Global Advisors believes that the single most important driver of long-term value is a strong, independent and effective board exercising high-quality oversight. In turn, we have long appreciated the positive correlation among diversity at the workforce and board levels, effective boards and oversight and sustainable long-term financial performance. As such, whether through our long-standing stewardship focus on gender diversity and board effectiveness, amplified by our Fearless Girl campaign, or the integration of Sustainability Accounting Standards Board (SASB – see Figure 1) diversity metrics into our Environmental, Social and Governance (ESG) scoring system, R-Factor™1, we have called on companies to disclose more details regarding the diversity of their boards and workforces.
The ongoing issue of racial equity has caused us to focus more closely on the ways in which racial and ethnic diversity impacts us as investors. As such, we are writing to inform you that starting in 2021, State Street Global Advisors will ask companies in our investment portfolio to articulate their risks, goals and strategy as related to racial and ethnic diversity, and to make relevant disclosure available to shareholders.
As long-term investors, we are convinced that the lack of racial and ethnic diversity and inclusion poses risks to companies that senior managements and boards should understand and manage. The risks that can arise from having a homogeneous board and workforce are well understood and drove our focus on gender diversity years ago. Research demonstrates the tendency for groups composed of people from similar backgrounds to refrain from challenging prevailing views, as well as the positive impacts that diverse groups can have on improved decision making, risk oversight and innovation.2 Other studies have shown that management teams with a critical mass of racial, ethnic and gender diversity are more likely to generate above-average profitability.3 Further, companies that promote workforce diversity and inclusion through transparent hiring, promotion and wage practices have seen improved productivity,4 revenues5 and market share.6 Likewise, companies with limited diversity are more likely to underperform their peers7 and face reputational risks.8 Unfortunately, while companies in the United States are required by regulators to track racial diversity data, only 4% of Russell 1000 companies publicly share detailed data on their employees’ gender and ethnicity.9
While gender diversity data is generally measurable and comparable among companies across the globe, our engagements with portfolio companies have revealed that tracking racial and ethnic diversity is challenging for companies, boards, and investors. Racial and ethnic diversity may vary significantly across different countries and regions. From a disclosure standpoint, some countries limit the gathering of information related to racial and ethnic minorities. In addition, while SASB’s approach to human capital management is evolving, its current diversity metrics only apply to nine industries.
While we acknowledge these complexities, we also believe it is critical for boards and investors to have more robust information and data regarding the racial and ethnic workforce diversity of companies in their portfolios and to understand the steps they are taking to achieve relevant goals. To this end, we ask that US companies in our portfolio and, to the greatest extent possible, non-US companies, provide specific communications to shareholders in five key areas: