In his 2021 letter to directors, Cyrus Taraporevala, President and CEO of State Street Global Advisors, one of the largest institutional investors, announced SSGA's main stewardship priorities for 2021: systemic risks associated with climate change and the absence of racial and ethnic diversity. SSGA intends, he said, "to hold boards and management accountable for progress on providing enhanced transparency and reporting on these two critical topics." SSGA's new voting policies reflect those intentions.
ESG. Highlighting the importance of ESG to investors, the letter cited the findings of a Harvard professor that "companies with strong ESG characteristics experienced less negative stock returns during the market collapse, relative to competitors ... [including industries] most affected by COVID-19." SSGA employs the R-Factor" scoring system, based on the SASB framework and focused on "financially-material, industry-specific ESG risks." In 2020, SSGA began voting against companies that scored in the R-Factor" bottom 10% and could not articulate a plan of improvement. In 2021, SSGA intends to continue to engage with companies with underperforming scores. In addition, in 2021, SSGA plans to engage with companies to understand their "approaches to mitigating and managing the physical and transitional impacts of climate change," focusing on "specific companies especially vulnerable to the transition risks of climate change" and other companies that, "while not as carbon intensive, also face risks such as the physical impacts of climate change."
Racial and Ethnic Diversity. Again, the letter cites research showing that diverse groups can lead to "improved decision making, risk oversight, and innovation," that diverse management teams are more likely to generate above-average profitability and diverse workforces can result in "improved productivity, revenues, and market share." Investors, however, are somewhat hamstrung by the lack of transparency of data in this area. Accordingly, SSGA is implementing new proxy voting practices, outlined in Guidance on Enhancing Racial and Ethnic Diversity Disclosure:
- "In 2021, we will vote against the Chair of the Nominating
& Governance Committee at companies in the S&P 500 and FTSE
100 that do not disclose the racial and ethnic composition of their
boards." In the guidance, SSGA indicates that acceptable
- "Aggregate-level (e.g., '5% of our Directors are Black,' 'Seven of our Directors are people of color,' '30% chose not to self-identify')
- Individual-level (e.g., 'Jane Doe is African-American, John Smith is Caucasian,' etc.)"
- "In 2022, we will vote against the Chair of the
Compensation Committee at companies in the S&P 500 that do not
disclose their EEO-1 Survey responses." In the guidance, SSGA
indicates that acceptable disclosures include:
- "The original EEO-1 report response.
- The exact content of the report translated into custom graphics."
- "In 2022, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least 1 director from an underrepresented community on their boards."
In the absence of a formal commitment to comply with the expectations above, the guidance indicates, SSGA will taking voting action against the appropriate directors. The letter also puts companies on notice that SSGA expects "thorough engagements on these and related subjects in the coming year." In the guidance, SSGA states that, in 2021, it will engage the largest employers on human capital management topics, including racial and ethnic diversity.
In August 2020, SSGA advised board chairs of its expectation that companies would provide public disclosures in five key areas:
- "Strategy Articulate the role diversity (of race and gender, at minimum) plays in the firm's broader human capital management practices and long-term strategy.
- Goals Describe what timebound and specific diversity goals (related to race and gender, at minimum) exist, how these goals contribute to the firm's overall strategy, and how these goals are managed and progressing.
- Metrics Provide measures of the diversity of the
firm's global employee base and board, including:
- Workforce Employee diversity by race, ethnicity and gender, broken down by industry-relevant employment categories or levels of seniority, for all full-time employees. In the US, companies can use the disclosure framework set forth by the United States Equal Employment Opportunity Commission's EEO-1 Survey. Non-US companies are encouraged to disclose this information in alignment with SASB's guidance and nationally appropriate frameworks.
- Board Diversity characteristics, including gender and racial and ethnic makeup, of the board of directors.
- Board Diversity Articulate goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company's workforce, community, customers and other key stakeholders.
- Board Oversight Describe how the board executes its oversight role in diversity and inclusion."
Shareholder Proposals. SSGA's framework for analyzing diversity-related shareholder proposals can be found in its Q3 2020 Stewardship Activity Report. Building on its framework for evaluating environmental and social proposals, SSGA will also take the following factors into account for diversity-related proposals:
- "Does the company articulate the role diversity (of race and gender, at minimum) plays in the firm's broader human capital management practices and long-term strategy?
- Does the company describe what diversity goals (related to race and gender, at minimum) exist, how these goals contribute to the firm's overall strategy, and how these goals are managed and progressing?
- Does the company provide measures of the diversity of its global employee base and board, including (1) EEO-1 report data on gender and race for US companies and (2) diversity characteristics, including gender and racial and ethnic makeup, of the board of directors?
- If a company does not disclose that it has a diverse representation on its board, does the company articulate goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company's workforce, community, customers and other key stakeholders?
- Does the company describe how the board executes its oversight role in diversity and inclusion?"
If the company satisfies four or five factors, SSGA will most likely vote against the diversity-related proposal. If only three or fewer are satisfied, SSGA will most likely engage with the company "to seek further alignment with our expectations." SSGA may abstain if the company commits to improvement, but in the absence of a commitment, SSGA will "most likely support proposals that would meaningfully advance diversity-related disclosures."
California has adopted two statutes mandating board diversity. First, SB 826, adopted in 2018, requires that a "publicly held corporation" (that is, a corporation with outstanding shares listed on a major U.S. stock exchange) with principal executive offices (according to its Form 10-K) located in California, no matter where it is incorporated, include specified numbers of women on its board of directors. Under the law, each public company was required to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors. (See this PubCo post)
AB 979, adopted in 2020, was designed to do for "underrepresented communities" on boards of directors what SB 826 did for board gender diversity. (See this PubCo post.) Like SB 826, this new law will require, no later than the close of 2021, each public company headquartered in California, no matter where it is incorporated, to have a minimum of one director from an "underrepresented community." A director from an "underrepresented community" means a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender. No later than the close of 2022, a corporation with more than four but fewer than nine directors will be required to have a minimum of two directors from underrepresented communities, and a corporation with nine or more directors will need to have a minimum of three directors from underrepresented communities. As with board gender diversity, the bill will likely have the effect of compelling companies to look outside their traditional channels to find new directors from underrepresented communities.
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