The Changing Dynamics Between Investors & Boards

Shareholder engagement, State Street

Earlier this month, 62 corporate directors gathered in Napa Valley, California to discuss a variety of strategic and governance issues ranging from shareholder engagement to corporate culture. Hosted by Diligent, the multi-day event featured interactive panels and fireside chats with ample time to network with fellow directors. In this blog, we recap the session with Rakhi Kumar, Senior Managing Director & Head of ESG Investments & Asset Stewardship for State Street Global Advisors.

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State Street Global Advisors is well known for its strong policies on ESG and board diversity. Notably, the institutional investor made headlines in the 2017 proxy season for voting against directors on 400 boards without gender representation (and with no hint of future representation). In the first panel of Diligent’s Directors’ Experience event, TK Kerstetter, Host of Inside America’s Boardrooms, interviewed Kumar to better understand State Street’s expectations for ESG, risk management, and board composition. We’ve summarized below:

If an organization is doing well, is generating shareholder value, and is compliant, but does not have board diversity… will State Street still vote against them?

The answer is Yes. However, boards must keep in mind that, for State Street, the push for women on boards is “the means”, and not “the end” itself. The institutional investor views board quality as foundational to good governance and long-term financial sustainability. With the research that’s now available, Kumar explained that the business case for board diversity is no longer penetrable. How can State Street or the companies it’s vested in effectively serve half the population (i.e., women and other minorities) without incorporating their viewpoints at the board and management level?

State Street is using the Investor Stewardship Group’s principles as a framework for assessing board and governance quality.

For those unaware, the Investor Stewardship Group (ISG) is a coalition of 50 institutional investors who examined commonalities among their voting patterns and established six Corporate Governance Principles to which they expect all U.S. companies to adhere. The ISG’s founding members (including State Street, BlackRock, Vanguard and others) represent over $22 trillion in investments and tens of millions of votes; yet, many questioned how the ISG principles would be leveraged by investors or used to influence corporate governance.

This year, Kumar explained that State Street used the ISG’s principles to screen the S&P 500 and identified 63 ‘significantly noncompliant’ companies, each of which the investor has since contacted to request meetings. On the other side, Kumar lauded Prudential as being one company that proactively addressed the six principles in its 2018 proxy statement. Boards that are unfamiliar with the Investor Stewardship Group would be wise to read up and be prepared to engage with investors on these six Corporate Governance Principles in the months ahead.

Too many directors inherit a governance structure when joining a board, and they don’t ever ask why things are the way they are.

For this reason, Kumar views the “G” as the most important part of the ESG formula. She finds that companies with good governance are less likely to have issues on the environmental or social side. As boards evaluate their governance structures, she also encourages them to take a closer look at their reporting dashboard, which has historically been financially driven. “Do you get a quarterly report on employee turnover? On emissions?” she asked. In the lens of ESG, boards need to think more holistically about risk–not only about the probability of certain risks, but about the impact.

State Street does not necessarily view past success as an indicator of future performance.

In other words, positive financial performance does not exempt your company from engaging with major shareholders, communicating long-term strategy, or demonstrating board oversight of culture. Kumar explained that better engagement is coming from the C-suite, but she wants to continue to hear from the directors themselves. “It doesn’t mean that the directors need to know everything,” stressed Kumar. “Some of the best conversations I’ve had have been focused on creating an open and honest dialogue.” Board members must continue to improve their discussions around company strategy as investors’ requests to engage will only become more commonplace in the months ahead.

Other sessions at Diligent’s Directors’ Experience events included a panel titled, The Next Generation of Cyber Resilience, where various private- and public-company CEOs, CIOs and CTOs explained how today’s boards should be structuring committee oversight, building their cybersecurity dashboards, and integrating cyber resilience into the company culture.

The keynote session, The Art & Science of Corporate Culture, featured an interview between Diligent CEO Brian Stafford and Maggie Wilderotter, former chair & CEO of Frontier Communications and board member with Costco Wholesale Corporation, Hewlett Packard Enterprise Company, Tanium, Inc., and DocuSign Inc. (among others). Wilderotter shared examples from her days at Frontier Communications, where she successfully overhauled the culture upon her arrival as CEO in 2004; she drew various implications for today’s directors who are tasked with understanding, monitoring and even influencing culture from the board level.

Diligent hosts its Directors’ Experience events annually in Napa Valley, California as well as in international locations including Tuscany and Lake Como, Italy. “Our goal with these events is to give directors the opportunity to learn from one another,” said Diligent CEO Brian Stafford, “but also to create a forum for examining–ever challenging–governance practices in today’s boardrooms. We also like to think that we create some pretty unforgettable experiences along the way.”

Don’t miss highlights from previous year’s Directors’ Experience events: