As one of the largest index investors in world equity markets, State Street Global Advisors has real power to influence how listed companies behave.
Through its asset stewardship program, SSGA engages with its portfolio companies on environmental, social and governance (ESG) issues its clients – some of the world’s biggest asset owners – think matter to long-term value creation.
State Street is the world’s third-largest funds management firm, controlling more than US$2.4 trillion ($3.3 trillion) in assets. The firm manages money on behalf of some of Australia’s largest institutional investors, including the Future Fund, AustralianSuper and QSuper.
Ahead of his upcoming visit to Australia to address the Investment Magazine Chair Forum later in January, State Street Global Advisors president and chief executive Ron O’Hanley answered questions about the firm’s stewardship program.
IM: As a passive investor that doesn’t threaten divestment, how can SSGA influence the ESG standards in listed companies?
RO: As one of the largest passive managers in the world, we are the closest [thing to] near-permanent capital. For as long as a company is in the index, we will own it on behalf of our clients. That fact underlies our unique position as a long-term steward and provides effective tools for influencing behaviour beyond divesting. Our engagement program focuses on a constructive process of positive change. We use both our voice and our vote to effect that change, and we are transparent and explicit in communicating our expectations and explaining the rationale behind our votes.
What issues are you currently focused on?
In 2016, we focused on the attributes of effective independent board leadership, which I highlighted in my letter to board leaders of companies in the S&P 500, FTSE 350, CAC40, DAC 30 and ASX 100.
In 2017, we will be focusing on how boards can work with management to assess the impact of ESG issues and incorporate a sustainability lens into long-term strategy.
We regularly issue guidelines to portfolio companies on a host of [ESG] issues that impact value in the long term, such as: independent board leadership, board composition and refreshment, pay strategies, gender diversity, climate change risk and oversight, water management, activist engagement, and diversity and inclusion.
How do Australian superannuation funds stack up against their global peers in terms of their approach to ESG engagement?
Australian super funds have had a pioneering role in direct engagement with company boards and are probably more advanced than many institutional owners elsewhere when it comes to prioritising ESG issues. We believe there is a real opportunity for Australian institutional investors to help educate others on the long-term impact of ESG factors.
Why do you think that is?
A national policy framework is supported by the Australian Council of Superannuation Investors governance guidelines, the ASX’s Corporate Governance Principles and Recommendations, and the Financial Services Council’s Blue Book.
Australian clients tend to have a deeper appreciation and understanding of the impacts of environmental and social issues on long-term value creation at companies. This is in line with priorities of our more sustainability-focused international clients. In a “sunburnt country” … water resource management, for example, has always been mission critical.
Our efforts to improve board refreshment over several years resulted in reversing a worrying trend in the US toward longer board tenure, which in some cases was undermining board independence.
In 2014, we were the first large institutional investor to introduce director tenure guidelines and ensured that our votes were aligned with them, even if it meant voting against directors more frequently than the market average.
By the end of 2016, we had successfully changed the trajectory of the average director tenure in the market, which now stands at 8.6 years at S&P 500 company boards, compared with 8.8 years in 2014.
What about locally?
In Australia, we were part of a major initiative focused on adopting voting by poll at annual general meetings (AGM). In March 2015, SSGA joined a group of 25 international and domestic investors in Australia and identified 38 ASX-listed companies we felt should adopt voting by poll for all matters at [their] next [AGM].
By the end of 2015, almost two-thirds of the companies we identified for changing this policy had moved to voting by poll on all resolutions, demonstrating the power of global investor collaboration on corporate governance issues.
Traditionally, these companies had used the show-of-hands method to count votes at their shareholder meetings. While permitted under Australian law, a show of hands gives each shareholder at the AGM a [single] vote, regardless of the number of shares they own in a company. Conversely, the voices of shareholders that are not present at the meeting go unheard.
Voting by poll gives shareholders the right to vote in proportion to their economic stake in a company. It upholds the one-share, one-vote principle that is fundamental to institutional investors, who hold significant shareholdings on behalf of their beneficiaries but might not be able to attend AGMs in person.
When can an investor wield the most power over a company’s strategy? When they are looking to buy? When they are already an investor?
As the shareholders of a company, asset owners have power, often unused, at all times.
In our view, asset owners wield the greatest influence over a company’s strategy and sustainability practices when they are selecting their asset manager (internal and external). This is because the asset manager, as steward and fiduciary, will help create and protect long-term value for the asset owner if the manager does its job properly.
When making proxy voting decisions and during engagement, an asset manager represents the interests of not only the asset owner but of all their other clients. Even if asset owners retain their proxy voting rights, the shadow of their investments follows the asset manager and adds to the leverage a manager has with a company during the engagement and voting process. Therefore, an asset owner’s management selection process should appropriately evaluate and rate a manager’s stewardship efforts, irrespective of investment strategy.
State Street Global Advisors president and chief executive Ron O’Hanley will deliver a keynote address on how investors can help listed companies think long term at the Investment Magazine Chair Forum in Healesville, Victoria, January 29-31, 2017. Register at chairforum.com.au or contact Emma Brodie via [email protected] or +61 9227 5708.