SSGA ramps up opposition to boards and management on ESG issues
State Street Global Advisors (SSGA) is among the world’s largest and leading asset managers to bring environmental and governance issues to the foreground in their engagements and voting patterns with portfolio companies.
SSGA expanded its gender diversity campaign last year to include its portfolio companies in Canada and Japan, and the asset manager showed that it was willing to vote against management in the US, UK and Australia on the topic. It also ramped up engagement with portfolio companies on climate-related issues, according to the manager’s stewardship report.
SSGA has garnered a lot of headlines for its Fearless Girl statue, which is stationed opposite the Charging Bull, and has expanded is investor stewardship team significantly in the last 18 months.
Speaking to IR Magazine, Rakhi Kumar, SSGA’s global head of asset stewardship and ESG, says that her firm’s patience is running out with portfolio companies that aren’t heeding SSGA’s warnings on topics like board diversity, refreshment and climate change.
‘Given that we started talking about some of these issues in 2011, it’s really difficult to have patience with companies at this point,’ she says. ‘I understand having patience on emerging risks, but I don’t think investors are willing to wait for three years for management to respond to these issues. Why haven’t they prioritized them?’
In 2017, SSGA revised its voting guidelines in the US, UK and Australia to make it clear that gender diversity was an important issue for the asset manager. It then engaged with 787 companies to share its concerns about the lack of female directors in the boardroom.
Following this engagement, 153 companies added a female board director in 2017. Of these, 129 of were based in the US, 16 were based in Australia and seven were based in the UK. A further 34 companies have committed to adding a female director.
‘The fact that so many companies have been able to respond to our engagement by adding women to their boards shows that people have to look outside of the normal parameters,’ says Kumar. ‘If you say you’re only looking for a sitting or former CEO, you’re going to struggle to find women. None of the companies are talking about giving up board quality. I think [these statistics] say more about having a nomination process that is broad enough to identify good candidates.’
SSGA voted against the remaining 511 companies that didn’t have a woman on their board and showed no signs that they intended to add one. This number could well rise in 2018, with SSGA having expanded its engagement to Canada and Japan, taking the number of companies it will engage with on the issue up to 1,700.
Board refreshment and evaluation
Kumar’s team have been tracking board refreshment since 2014, when they decided to start a 10-year screen for director turnover. ‘We were trying to understand how board composition is changing as strategy changes,’ she says. ‘In 2014, it was a few years after the financial crisis and we were trying to identify companies that hadn’t changed their board in five or six years, because virtually every company’s strategy changed during that time.’
In 2017, SSGA voted against the reelection of 739 board directors at 359 companies, after targeting boards with poor refreshment policies.
‘In an ideal world, you have board evaluations happening, but I’ve heard from directors that it can be very difficult to ask other directors to leave a board,’ Kumar says. In lieu of universal data about board evaluations and performance, Kumar says this leaves her team having to focus on ‘blunt instruments’ like term limits and retirement ages in countries where they are applicable.
SSGA’s stewardship report identifies climate change as a thematic priority for the firm in the coming years. Despite past engagements with companies on climate issues and reporting frameworks such as the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures, the report notes disappointment that companies are still struggling to link climate risks to their own long-term strategy.
The report does say that board directors are increasingly able to discuss climate risks compared to a few years ago, but notes the difficultly in showing how those risks pose a threat to their specific company. Kumar’s team released a whitepaper last year for companies in the oil, gas, utilities and mining sectors to provide guidance around what kind of disclosures they find to be useful.
In 2017, SSGA engaged with 108 companies on their response to climate issues and voted against management in 80 percent of cases where a climate issue went to the ballot. Kumar fears that there is a disconnect between the concerns of long-term investors like SSGA and the views that company management hear from the Street, which may be more short-term oriented.
‘The investor demand is there,’ she says. ‘But typically who do CEOs and CFOs hear from? They hear from analysts on quarterly calls, where the time horizons are very different. I’m not on quarterly calls because we’re long-term investors and we’re looking at long-term risks. We’ve published papers, we’ve sent letters, and we’ve talked about these issues at conferences for years. But we’re still trying to pivot management’s views to the long-term and that’s very challenging.’
As a more specific climate issue, SSGA engaged with 49 companies on water management in 2017. Almost two thirds of those engagements were with companies in the energy, utilities, materials, pharmaceuticals, biotechnology and life sciences, food, beverage and tobacco sectors.
The authors of SSGA’s stewardship report write that a ‘key takeaway from our engagements on water management in 2017 is that the mismanagement of water resources can have negative effects on corporate value.’
The report encourages companies to disclose more information about water usage statistics, including the use of water in the supply chain. It notes that 40 percent of the world is currently affected by water scarcity, and therefore this will likely be an issue that has an impact on a lot of companies’ operations in the near future.