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 disclosures include:
- “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.
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.”