Race & Ethnicity and the Role of Asset Stewardship

Thank you for that very kind introduction, Lucian (Bebchuk). It’s wonderful to be with you at Harvard—even if virtually—at this remarkable and important institution.

I also want to acknowledge everyone joining today. Hopefully it won’t be long before we can see each other in person again.

Obviously, the past 12 months have been extraordinary—and certainly, there is no lack of weighty topics we at State Street Global Advisors have been engaged on as an asset manager for a long time, such as Climate and Governance.

Today [March 25, 2021], I’d like to focus on just one topic from within our broad Asset Stewardship set of topics—to discuss the important role of racial and ethnic diversity in our Asset Stewardship program—and provide some insight into our engagements with companies on this issue and why we’ve taken the approach we have, and our plans going forward.

But first I want to say a few words about this moment, how we got here, and how it fits in to the evolving role asset managers have been playing, especially in recent years.

The Changing Role of Asset Stewardship

As a long-term investor in more than 10,000 public companies across the world, we have a somewhat unique view into all the factors that drive a business’s long-term value—across sectors and geographies.

However, for all companies it is clear that there is nothing more important driver of long-term value than a strong, independent and effective board that exercises high-quality oversight. And as index managers who effectively hold quasi-permanent capital in the companies in which we invest on behalf of clients, we have both a lever—and fiduciary obligation—to ensure the board is doing just that.

That’s why for the past several years we have been engaging with companies in our portfolios on a range of issues—from board refreshment, to climate change, to corporate culture.

For us, it’s very important that you understand that this work has been about value, not values.

Value, not values.

Now, what do I mean by that?

Well, as part of a global company that employs some 40,000 people, of course we have core values—and very strong feelings and opinions about the things that are important to us.

But our goal is not to impose our personal values on our clients and their portfolios—but to be as outcome-oriented, transparent, and focused as possible on value for our clients and their portfolios. This is something I’ll keep coming back to in the course of this hour.

And so while, say, an issue like climate change may speak to our values and the values of many of our clients, it is the value argument—how an issue like climate does or does not impact performance—that speaks to all of them.

Why am I discussing this? Well, in part that’s because of the increasingly prominent role diversity is playing in performance. Diversity is an issue I am sure we all care about from a values perspective—but it is also recognized to have a material impact on companies and investors from a value perspective.

Four years ago, as many of you know, State Street Global Advisors unveiled the Fearless Girl statue at the tip of Wall Street to symbolize the power and performance of having women in leadership.

Fearless Girl’s placement—accompanied by our announcement that we would be using our engagements and proxy votes to hold companies accountable for adding women to their boards and their senior ranks—sent a clear message:

Having women in leadership was not simply the “right thing to do”—but it was the smart thing to do for our clients to drive value in their portfolios. Because it contributes to performance.

We’ve all read the empirical findings on the tendency for groups composed of people from similar backgrounds to refrain from challenging prevailing views …

And the countless examples of companies who credit workforce diversity and inclusion as a key component to their ability to foster innovation.

And that brings me to today.

I believe the pandemic and the killing of George Floyd permanently changed how people see issues of race, ethnicity and gender—including as investors.

Indeed, in the wake of our initial public reactions last summer, we have seen prominent organizations and even some stock exchanges step up on this subject in significant ways.

But it would be a mistake to see the prominence of issues like diversity in asset stewardship efforts simply as a matter of values trumping value.

Rather, I believe it is actually a reflection of an acceptance that intangible assets such as human capital are a critical value driver for companies.

Think about it. We are increasingly seeing how a host of issues can contribute to the risks a company takes on … or the opportunities that they can lean into.

From customers not wanting to do business with companies that discriminate or pollute …

To businesses looking for partners that demonstrate their commitment to sustainability and inclusion.

And let’s be clear: for us as asset managers, this trend makes our jobs a lot harder. We now need to understand how these issues—which go well beyond the profit and loss statement and the balance sheet statement—can impact, or even drive, value.

Our Actions on Racial and Ethnic Diversity

But to do that, we need reliable, transparent and publicly available data. And unfortunately, especially when it comes to racial and ethnic diversity, there is a striking lack of publicly available data.

All told, only 6% of Russell 1000 companies actually share detailed EEO-1 data publicly on their employees’ gender and ethnic identities—EEO-1 data, despite its flaws, is pretty much the standard vehicle for this disclosure in the United States.

Disclosure not only helps investors make more informed decisions. More systematic transparency also empowers other stakeholders—from employees to clients, to prospective clients, to regulators.

That is why last August 2020, we offered guidance to our portfolio companies—we called on them to begin engaging with us in five key areas as it relates to racial and ethnic diversity: strategy, goals, metrics, board diversity, and board oversight.

Since last August, we’ve had over 100 conversations with boards to better understand the challenges they face.

What we were hearing was quite different than some of the surprise and confusion we heard from portfolio companies when we first announced our Fearless Girl campaign 4 years ago.

Here, there has been a real sense of momentum. The overwhelming majority of companies told us they were already planning on enhancing their disclosure—and most were already prioritizing addressing the issue across the organization.

While many directors shared they were doing this because not only was it the right thing to do, there was also something else:

A broad awareness that a lack of focus on diversity and inclusion can represent reputational risk—as well as the potential opportunities that integrating diversity and inclusion into long-term business strategy could offer and a sense that they were missing the boat on this.

We saw this newfound acceptance as an opportunity as well. In our subsequent proxy letter this January, we called for companies to disclose racial and ethnic diversity data as well as their diversity strategy—and we let companies know that we were prepared to use our vote to hold them accountable.

Specifically, we said that, beginning in 2021, we expect companies in the S&P500 and the FTSE 100 to disclose the racial diversity of their Boards—and by 2022 to have at least 1 nonwhite director. We also said that, starting in 2022, we would be asking companies in the S&P500 to be prepared to disclose data on the diversity of their workforce via the EEO-1 report.

As with all our stewardship efforts, the two tenets of our approach to racial and ethnic diversity are engagement and voting policy. We use our voice and our vote, but this is not a game of “gotcha” with our portfolio companies. We want to engage and understand the challenges they face in meeting our expectations. But to leave you no doubt, we do use our vote after having that engagement.

We believe engagement is critical to making progress on these issues. We decided to focus initially on the largest employers in US and UK, but have also begun a proactive campaign in 2021 in other geographies—so that we can start to understand the global perspective on these topics. And we will share those insights later in the year.

We are incorporating both board and workforce diversity and specific timelines for accountability, we believe that our voting policies will strike the right balance between allowing companies to get up to speed and also pushing laggards forward.

Along a parallel path, we’ve been part of a new organization called “The Corporate Call to Action” that I sit on, that is working with 14 other financial services companies, asset managers and the Connecticut State Treasurer and the Ford Foundation, to use our collective power on the topic of racial and ethnic diversity—including, as a first step, having all members of this group disclose their EEO-1 data.

Stay tuned for more to come on that.

What We’ve Learned from Our Engagements

So, what have these engagements taught us thus far?

On the positive side, companies are articulating the business case for diversity—as well as their efforts to increase board racial diversity.

One-third of the companies we’ve engaged with are committing that they will increase their disclosures to align with our expectations.

However, there are actually fewer who are outlining specific and timebound goals related to racial diversity, board and workforce metrics, and board oversight of diversity and inclusion.

Let me give you some specific examples to bring it to life.

First, companies are definitely feeling pressure to disclose this information.

Before we even finished our request for EEO-1 disclosure from one large financial services company, they said, “We’re on it.” So clearly we were not the first voice they’d heard on this topic.

They had been flooded with requests as they shared with us—not simply from institutional shareholders but from a host of other stakeholders.

This is something we’re seeing across sectors dependent on high-skill human capital, be that financial services, technology companies, communications companies. Indeed, this is why the SASB framework finds human capital management financially material for these sectors.

Secondly, we see that companies are both unearthing—and sharing—diversity challenges. And they’re quite open about the challenges.

One utility provided us with a robust breakdown about the diversity and equity of their workforce. As pleased as we were by that, we were even more encouraged by the transparency that included them sharing some pretty uncomfortable findings from an employee survey. In that survey, their Black employees reported that they had actually felt a lower sense of inclusion at the company in the months after George Floyd was killed.

I was struck by this revelation—in part because it seemed to run counter to the flood of efforts to reach out to communities of color—but I was also struck very positively that this company voluntarily shared this information.

Third, a number of companies we’ve engaged with are seeing the business case for racial and ethnic diversity. One European pharma company is focused on this issue in the context of the diversity of patients involved in the clinical trials for one of their drugs. Here in the US, the board of a logistics company now has diversity and inclusion as a standing item on their Board’s agenda.

A standing item on their Board’s agenda. Think about that. We’ve come a long way.

Fourth, we’re seeing that global companies are thinking about diversity beyond, gender, race and ethnicity at least the way we think about it in the US.

For instance, one tech company we engaged is one of the largest employers in the world. They have a huge workforce in India, which is where I grew up, by the way. So, they are trying to uncover and anticipate what kind of other diversity challenges that are relevant in India—whether gender, nationality, race, caste, or other dimensions.

This has implications for a host of multinational companies—including us at State Street Corporation.

These are all very positive developments—but there are some challenges as well.

For one, we are seeing some of the limits to disclosure alone—how EEO-1 and other disclosures don’t always tell the whole story about diversity at a company.

In some cases, we’ve engaged with companies who meet—or even exceed—our disclosure expectations—but face other diversity-related challenges that reveal these issues run deeper.

That’s one of the reasons why we are asking for more context, strategy and consistent engagement … speaking to some of these companies 2-to-3 times a year and approaching the topic more holistically.

We are also seeing companies who are frankly uncomfortable or frustrated by their own lack of progress.

While we are encouraged overall, some companies remain unfamiliar with their EEO-1 disclosure—and others are concerned the data doesn’t tell the whole story. That’s by the way, probably the number one area of pushback we are hearing—is the EEO-1 data good enough? It could be misleading—and so forth.

Of course, we welcome additional disclosure and context. But for us, this is about establishing a baseline for more transparency in the marketplace and obviously some comparability in that baseline data.

To help Boards get more familiar with this new landscape, we’ve also been developing oversight best practices playbook for directors which will be available in the second half of the year.

As one of 10 actions State Street—as a company—has committed to taking to address racism and inequality—which, by the way, includes tripling our Black and Latinx leadership and increasing our spend with diverse suppliers— As part of those 10 actions, we’re actually partnering with Russell Reynolds and the Ford Foundation to interview leading Directors in the US and UK to share insights and to learn from their insights on what effective board oversight looks like in this area.

Through interviews with directors of the largest companies, our goal is to understand the risks they see to their businesses regarding race and ethnicity, how often they talk about it at the board level, and most importantly, what those conversations sound like, because they clearly can be different and a little uncomfortable.

Given how important this conversation has become to asset managers—and how unfamiliar it is for a lot of directors—our goal is to create a guide—a “playbook” if you will—that boards can use to conduct oversight on these issues.

As much as disclosure is about creating a window into these issues at the companies in which we invest, for us at State Street, it is also about looking at ourselves in the mirror—what we do well as a company, but also where do we need to improve, the conversations we need to have, and how we can hold ourselves accountable for progress.

Close: The Leadership to Drive Progress

The point is, every company in the world is on a journey when it comes to diversity—which is why it is important to be transparent about these challenges, to be quite candid about the challenges and not pretend anybody’s perfect.

We certainly know we’re far from perfect on this at State Street.

But I am very encouraged by our progress—since our CEO and Chairman made a commitment last summer, we have added Black and Latinx representation to our board. I am very proud. 23% of our Board directors are from underrepresented communities, and 31% of our Board are women.

That’s a start, a good start—but we still have a long way to go.

What that tells me is that not only we all have work to do—but the sooner we acknowledge where we are falling short, the sooner we can begin to make progress. That is the power of disclosure … of providing that window … and of looking into that mirror.

We have a fiduciary responsibility to raise our voice on issues that we believe drive value in our clients’ portfolios, frankly even when we, as an asset manager, aren’t flawless on those issues ourselves.

But that is not where our responsibility ends.

State Street, Harvard and so many of you participating in this forum … we are all privileged to be part of remarkable institutions.

Increasingly, businesses and people are looking to institutions like ours—not because we are perfect on these issues, but because of our knowledge and expertise to solve complex problems.

They are also looking to us for our ability to set examples, marshal resources … and drive progress. To drive value, not just values.

They are expecting us to lead.

With your partnership, I know we can … and we will. Thank you.