Forging a culture of accountability


Forging a culture of accountability Ethical BoardroomBy Rakhi Kumar – Senior Managing Director, Head of ESG Investments & Asset Stewardship, State Street Global Advisors



As one of the world’s largest asset managers, State Street Global Advisors strongly believes in a culture of shareholder accountability. After all, we are the stewards of other people’s money and we take that role with equal measures of seriousness and diligence.

One of these accountabilities to shareholders – the most important, some may argue – is we help them achieve the financial security that aligns with their long-term objectives. This we do, in part, by developing and offering a range of innovative investment strategies, powered by a global network of more than 500 long-tenured investment experts.

The second, less obvious, but critically important responsibility, which strongly supports our primary investment objective, is one of stewardship.

Contrary to the argument that the rise of flows into index-based strategies results in weakened governance standards, our strongly active stewardship programme is aimed at helping companies strengthen their approach to environmental, social and governance (ESG) issues that can impact the long-term returns that our clients need to achieve their goals. Constructive, persistent and transparent engagement is the hallmark of our stewardship approach.

We regularly publish our views on important shareholder issues and measure and monitor the impact we are having. In 2016 we focussed on governance issues around board independence and effectiveness and in 2017 we called on companies to incorporate environmental and social sustainability into their long-term strategies. We have already seen significant impact from these two initiatives, with companies strengthening board quality to align with our guidance as well as improving their disclosure on sustainability practices. Last year’s campaign on gender diversity at board level was a direct result of our emphasis on board quality and the evidence showing that diverse boards make better decisions.

In 2018, we are focussing our strategic stewardship priorities on best practices related to diversity, governance and sustainability issues in the US and across the world. Specifically, it’s this year’s efforts that I want to outline in this article, since you’ll likely be hearing more about them as the year progresses.

“In 2018, we are focussing our strategic stewardship priorities on best practices related to diversity, governance and sustainability issues in the US and across the world”  

Each year, State Street Global Advisors develops its own strategic stewardship priorities that drive engagement at companies in which we invest. Our latest priorities are representative of the universal challenges facing every environmental, social and governance (ESG) focussed agenda. This year, in addition to gender diversity, we are focussing efforts on executive compensation and climate reporting. In addition, we’re paying special attention to companies in the retail (food, apparel, distribution), pharmaceutical and materials sectors.

Throughout the programme, there will be a special emphasis on any long-term, sustainable ESG commitments having direct ties to measurable goals. And our stewardship role in the global capital markets extends beyond proxy voting and engagement with issuer companies. It also includes promoting investor protection for minority shareholders in global markets and working with investee companies to encourage adoption and disclosure of ESG practices.

Spotlight on gender diversity

As many people know, State Street Global Advisors has led the asset management industry in its encouragement of gender diversity at the corporate board level. We’ve just celebrated the first anniversary of Fearless Girl, the iconic statue that became an overnight global sensation. We located her in the heart of New York City’s financial district with the expressed purpose of calling attention to the lack of female representation on corporate boards.

We underscored her introduction to the world with a call to action for companies in the US, UK and Australia to add at least one woman to their board, taking voting action against directors on those boards that did not take action on the issue. The rationale for encouraging the addition of women at board level is not purely to help balance the diversity equation. There’s a solid financial argument to be made for this as research shows that companies with women on their boards outperform companies without women at board level.

In the year since Fearless Girl was installed, State Street Global Advisors identified and reached out to more than 700 companies in the US, UK and Australia that had no women on their boards through direct engagement, our letter-writing campaign or using our vote to address their lack of board diversity.

In the end, State Street Global Advisors voted against more than 500 companies for failing to demonstrate progress on board diversity. In addition to the 152 companies that added a female board member, another 34 companies committed to adding at least one woman to their board in the near term. In 2018, we have expanded our diversity mission to Canada and Japan, where female representation on boards continues to be low, with 38.5 per cent of TSX-listed and 55 per cent of Topix 500-listed companies having no women on their boards at all.[1]

As an additional step towards corporate gender equality, we announced in March that we expect companies to now disclose gender diversity at all levels of management, not just at the board level. As part of that effort, we will begin screening and engaging with companies in the STOXX 600 and FTSE 350 indexes. During this engagement, we will seek to understand company practices that promote diversity throughout all levels of management.

Investor Stewardship Group

In January 2017, State Street Global Advisors, as part of the Investor Stewardship Group (ISG), published the first ever investor-led Stewardship and Governance Principles for the US market. The Principles, which are based on the commonalities of the public proxy voting guidelines of the founding ISG members, went into effect in January 2018.

I wrote about the formation of ISG and its mission in the Spring 2017 issue of Ethical Boardroom, but as a refresher, the six core principles for US listed companies are:

Principle 1: Boards are accountable to shareholders

Principle 2: Shareholders should be entitled to voting rights in proportion to their economic interest

Principle 3: Boards should be responsive to shareholders and be proactive in order to understand their perspectives

Principle 4: Boards should have a strong, independent leadership structure

Principle 5: Boards should adopt structures and practices that enhance their effectiveness

Principle 6: Boards should develop management incentive structures that are aligned with the long-term strategy of the company

So what’s new for this year?

Beginning with the 2018 proxy season, companies are being encouraged to articulate how their governance structures and practices align with the ISG’s Corporate Governance Principles and where and why they differ in approach. ISG signatories believe companies can best decide on how and where to disclose their alignment with the principles, for example, through investor relations, boards of directors or corporate governance websites or, as is most common, their proxy statement.

State Street Global Advisors’ ISG Compliance Screen

The ISG Principles are not intended to be prescriptive or comprehensive in nature. Clearly, there’s a multitude of ways in which a principle can be applied. As guidance, however, ISG has provided the rationale and expectations that underpin each principle on its website ( To identify companies for engagement, we recently created the State Street Global Advisors’ ISG Compliance Screen that identifies 13 voting guidelines encompassed in the six Principles. Companies that fail three or more of the 13 voting guidelines will be targeted for further review and engagement. This year, we will apply the ISG Compliance screen to the S&P 500 companies. Based on the 2017 proxy filings of companies, we found that:

  • 199 companies, or 40 per cent of the S&P 500, fully comply with our ISG Compliance Screen
  • Lack of proxy access is the most common reason for non-compliance with the Principles – an additional 81 companies would be in full compliance, but for giving shareholders proxy access
  • Other common reasons for companies screening out include:

– Lack of annual director elections

Inadequate board refreshment practices

Board is not sufficiently independent

Because of this new screen, we are now proactively monitoring companies for compliance with our voting guidelines on a comprehensive basis. The screen helps us engage and review company governance practices in a holistic manner against the expectations of a multitude of investors that back the ISG. In addition, it helps our firm, as an institutional investor, meet and demonstrate our commitment to the ISG Principles by holding portfolio companies accountable.

In March 2018, we began reviewing governance practices at S&P 500 companies for their adherence to the Principles and will proactively engage with organisations to better understand the reasons for non-compliance. If these companies fail to adequately explain their governance structures, we may hold the board accountable by taking voting action against select independent directors.

Figure 1, below, shows the distribution, of companies that screen out against State Street Global Advisors ISG Compliance screen.Forging a culture of accountability Ethical Boardroom

Potential proxy vote implications for omitted companies

Since the Compliance Screen is based on existing proxy votes and engagement guidelines, there are no new governance-related expectations being set in the market. The screen, however, allows us to proactively monitor corporate governance practices at portfolio companies and to assess if they are aligned with our long-term interests and market expectations.

To be sure, we don’t believe in a one-size-fits-all approach to corporate governance and, therefore, our preference is to drive meaningful engagement with companies to better understand their perspectives for their internal governance structure not meeting minimum investor expectations.

We encourage companies to proactively evaluate, disclose and explain their level of compliance with the Principles and have provided a framework to help directors assess their position on said Principles. In instances of non-compliance, when companies can’t explain the nuances of their governance structure effectively, either publicly or through engagement, our team will vote against the independent board leader for non-compliance with the Principles.

Executive compensation under review

Monitoring excessive corporate compensation has been a focus of State Street Global Advisors for many years. In the past, however, we simply voted ‘for’ or ‘against’ pay. In 2018, however, we’re stepping up our discomfort, either with a one-time payment or an entire pay structure, by abstaining from voting.

Often it’s the case that when we vote against companies, they think they must go back to square one, but that’s not always necessary. What an abstain vote is intended to say is that your proposal is not all bad, but there are some things that are making us less than comfortable with it. For perspective, last year we voted against some 600 of 5,200 pay proposals and we had concerns over an additional 300.

We believe that including the abstain option in our arsenal of responses increases transparency and will be more effective than our ‘for’ or ‘against’ model.


About the Author:

Rakhi Kumar is Managing Director and Head of ESG Investments and Asset Stewardship at State Street Global Advisors (SSGA).

As Head of ESG Investments, Rakhi leads SSGA’s efforts to strengthen integration of ESG into the investment process. She is responsible for developing the firm’s ESG investment philosophy and supporting investment teams with the design and development of ESG investment products. As Head of Asset Stewardship, she oversees all of SSGA’s proxy voting and engagement activities and is responsible for developing SSGA’s thought leadership in this area. Since taking over the department, Rakhi has strengthened SSGA’s stewardship program by incorporating a risk-based approach; developed and implemented new corporate governance, sustainability ESG and portfolio performance screening tools; identified stewardship priorities that drive SSGA’s annual stewardship efforts; and increased integration with investment teams across SSGA’s global investment centers.

Rakhi is Chair of SSGA’s ESG Investment Working Group and is a member of SSGA’s Senior Leadership Team, Global Proxy Review Committee, International Class Actions Committee, ESG Business Working Group and State Street’s Corporate Responsibility Working Group. She is also a member of the Council of Institutional Investors’ Corporate Governance Advisory Council and a member of the Principles of Responsible Investors’ (PRI’s) Bondholder Engagement Working Group.


1.The independent chair, lead independent director or most senior independent director up for election in that order