Ben Colton, global co-head of asset stewardship at State Street Global Advisors (SSGA), discusses the importance of the board’s role in overseeing topics such as diversity
SSGA’s proxy voting practices for 2021 included that the firm would vote against the nominating and governance committee at S&P 500 companies that do not disclose, at minimum, the gender, racial and ethnic composition of their boards. What was the response to that during engagement and did it evolve?
We started to bring racial and ethnic disclosure to the forefront in August 2020, outlining the expectations for disclosure around strategy, board representation, board oversight, metrics, targets and goals. We had many in-depth discussions with boards and management teams about our expectations and the challenges they were facing.
The response to our engagement has been very, very positive for the most part. We saw a huge jump in the number of companies that were disclosing not only their [Equal Employment Opportunity 1] (EEO1) data but also self-identified [information] on the race and ethnicity of board members. We were pleased with the level of disclosure many companies were putting in their proxy statements and in their sustainability reports during the fall. We were open to waiving our policy in those cases where we had firm commitments [to provide the disclosure we were seeking].
We also announced that we would vote against the chair of the compensation committee in 2022 if there was no baseline EEO1 disclosure. There are challenges with EEO1 data, we recognize that, but it is something that is easily collected and must be reported to regulators. We are also encouraging companies to build off that, to tell us why there’s more to the story. If there’s a better way to look at diversity in the organization, tell us how we should be looking at it and what the strategy is.
If there’s a better way to look at diversity in the organization, tell us how we should be looking at it and what the strategy is
Do you have a preference as to whether that disclosure goes in the proxy statement or an ESG report?
We’re agnostic as to where it’s disclosed as long as it’s in the public domain.
Did you find that board members were involved in these issues?
The conversation at the board level around disclosure and around oversight of diversity was much more robust this year. We did a study with Russell Reynolds and the Ford Foundation with about 30 directors at US and global companies and dug deep into understanding the risks boards should be discussing and what good disclosures look like, not only within their organization but across other stakeholder groups. Thinking about the communities in which they operate and which they represent. Thinking about other stakeholders, including their employees and shareholders.
We think the governance of social issues has really come to the forefront this year. I think that’s a very positive sign because ultimately the board should be accountable for overseeing financially material risks, and we believe diversity and inclusion is a financially material risk that we want to see more disclosure on.
Were board members involved in discussions with you as an investor?
Yes, absolutely. A majority of the discussions around these issues were at the board level. We want to have quality, robust discussions with board members and we expect them to be able to constructively engage in dialogue around this with investors.
[In terms of EEO1 data,] nobody’s where they want to be. The numbers are not where any company wants to be, including us. The overall conversation is not that we are expecting companies to be exactly where they want to be right now. Rather, we want to see the disclosure and know that what gets reported gets managed and improved upon.
Having that roadmap and being held accountable for targets and goals is, I think, very important. What are the advantages of your voting policy targeting committee chairs?
We also think shareholder proposals are a good route to raise awareness with companies and boards. We will support shareholder proposals that are aligned with our expectations.
We strongly believe that oversight of diversity is a financially material risk and opportunity that companies need to be thinking about
Could you elaborate on what you see as the board’s role when it comes to social issues such as diversity?
It’s the management team’s duty to execute strategy, but it’s the board’s job to oversee the execution of strategy, to oversee how risks are being mitigated or opportunities are being capitalized on. We use the board as our representation within the company to oversee financially material risks and opportunities, and we strongly believe that oversight of diversity is a financially material risk and opportunity that companies need to be thinking about.
We heard in our discussions in the research we published that a lot of directors say it’s about doing the right thing. But for us it’s about value and overseeing these risks. We’ve seen the headline risks manifest themselves, we’ve seen the power of harnessing diversity in thought, so increasingly we’re seeing these issues as being financially material and something the board needs to be thinking about.
Do board processes and structures feature in your engagement discussions?
Yes. Structure is important. We’re not prescriptive on where [these issues] should sit. Certainly, it should be a board-level discussion, just like any other strategic discussion. But we have also seen a lot of companies making explicit references to oversight of these issues in their charters and bylaws or within committees themselves. We think having that formal framework, making a more explicit reference to these issues and oversight of them, is a very positive thing.
How can investors assess the effectiveness of board governance when it comes to social topics?
That’s definitely the next step. First, we need the disclosure to understand what the picture looks like and then you can start thinking about performance. We also want to get examples of situations where maybe the board needs to think more deeply. For example, when we talk about corporate culture and we talk about employee engagement and surveys, we ask boards whether they can provide an example of where a hot spot was identified and what actions were taken to mitigate against any kind of risks that were brought up.
