State Street Global Advisors’ CEO Letter, Updated Proxy Voting Guidelines, and Guidance on Effective Board Oversight

In March 2023, State Street Global Advisors (SSGA) released its 2023 North America proxy voting guidelines accompanied by SSGA’s CEO letter on its 2023 Proxy Voting Agenda and an “Insights – Asset Stewardship” resource providing Guidance on Effective Board Oversight. Read about notable changes to its North America proxy voting guidelines alongside highlights of the CEO letter and Guidance on Board Oversight below.

Summary of CEO Letter

In her letter to Boards published in March 2023, SSGA CEO Yie-Hsin Hung acknowledges current trends in the market pertaining to environmental, social, and governance (ESG) issues and their potential impacts to long-term value creation. Hung believes that the risks and opportunities identified by SSGA are important for its portfolio companies to manage and boards to oversee, and its clients expect SSGA to encourage effective portfolio company disclosure of key information related to such material ESG risks and opportunities.

SSGA states its 2023 stewardship priorities are to encourage transparency and disclosure in the following areas:

1. Effective Board Oversight
2. Climate Risk Management
3. Human Capital Management
4. Diversity, Equity, and Inclusion

Further, Hung emphasizes the importance of SSGA’s engagement with company boards to ensure their accountability. Hung states that SSGA’s “approach over the years has been to use constructive engagement to encourage two-way dialogue with boards while at the same time holding them accountable for improving disclosure, oversight, and strategy. While shareholder proposals can be effective at raising awareness on certain issues, and we will support them when both reasonable and likely to maximize long-term value for clients, proposals are non-binding in most markets and often too prescriptive. By contrast, our team has found that votes in director elections are far more effective at focusing board attention on issues we believe important to long-term value and on which we have engaged with a portfolio company.”

Hung states that SSGA has found good disclosure reduces tendencies for shareholders to micromanage companies in which they invest. Hung also specifies SSGA’s concerns that a substantial increase in directors’ workloads may reduce their effectiveness. Instead of identifying overcommitted directors, SSGA expects that nominating and governance committees will be responsible for establishing and enforcing, as well as disclosing, robust director time commitment policies.

Hung provided the following insight on SSGA’s revision to their approach on director time commitments:

“Starting in 2024, we will 1) no longer use numerical limits to identify overcommitted directors, and instead 2) vote against the chair of the nominating and governance committee at companies in the S&P 500 that do not disclose their internal policy on director time commitments”.

“By providing clear guidance to nominating and governance committees on director commitment levels and holding them accountable through our annual vote, we hope to advance transparency on this issue, and prioritize other topics in our discussions with portfolio companies relating to long-term risks and opportunities.”

2023 North America Proxy Voting Guidelines – Notable Updates

In the introduction to its guidelines, SSGA has removed reference to “environmental” and “social” issues and added a new “market-specific” reference to its approach for proxy voting and engagement on topics including directors and boards, accounting and audit related issues, capital structure, reorganization and mergers, compensation, and other governance related issues.

As indicated last year, SSGA has implemented revisions to its board diversity policies for 2023. The previous requirement for all listed companies to comprise at least one-woman director on its board has been extended to a 30 percent threshold for women directors serving on boards of Russell 3000 companies (non-Russell 3000 companies remain at a one-woman director minimum). SSGA also added language to potentially waive its application of an accountability vote against nominating committee members or board leaders, which may apply for instances where a specific timebound plan is in place to achieve the applicable threshold of 30 percent or a one-woman director minimum. Further, SSGA extended its minimum disclosure requirement for gender, racial, and ethnic composition of its board from S&P 500 companies to include Russell 1000 companies. However, the minimum board requirement to include one director from an underrepresented racial/ethnic community remains limited to S&P 500 companies.

SSGA added a new “Risk Management” section, indicating its perspective that risk management is a key function of the board, which is responsible for providing oversight on the risk management process established by senior executives at a company. While SSGA is understanding of a board’s authority to have discretion in its approach and structure for providing oversight, SSGA expects companies to disclose how their boards provide oversight of their risk management system and risk identification processes. SSGA further states “Boards should also review existing and emerging risks that evolve in tandem with the changing political and economic landscape or as companies diversify or expand their operations into new areas.”

SSGA removed a section from its previous guidelines pertaining to its proprietary “R-Factor” ESG ratings methodology. R-Factor is a scoring system measuring performance of a company’s business operations and governance as it relates to financially material ESG factors, and is meant to encourage companies to disclose material, industry specific ESG risks and opportunities. The prior guideline referenced potential voting against senior independent board leaders at S&P 500 companies that are R-Factor laggards.

2023 Insights — Guidance on Effective Board Oversight

SSGA focuses on four key factors for assessing a board’s ability to provide effective oversight of financially material risks and opportunities. Analysis is typically based on a company’s disclosure and SSGA’s engagements with key company representatives such as directors and applicable committee members.

1. Oversees Long-Term Strategy 
• Articulates material risks and opportunities linked to a company’s long-term business strategy.
• Regularly assesses effectiveness and execution of long-term strategy.
2. Demonstrates an Effective Oversight Process
• Describes which committee(s) oversee specific risks and opportunities and which topics are overseen at the full-board level.
• Includes risks and opportunities in board and committee agendas and articulates the frequency of specific topics discussed at the committee or full-board level.
• Utilizes KPIs or metrics to assess effectiveness of risk management processes.
• Engages with key stakeholders including employees and investors.
3. Ensures Effective Leadership
• Holds management accountable for progress on metrics and targets.
• Integrates necessary skills and perspectives into board nominating and executive hiring processes, and provides training to directors and executives, including topics material to business and operations.
• Conducts a periodic effectiveness review.
4. Ensures Disclosures of Material information
• Includes publication of relevant disclosures on material ESG-related topics such a climate – For example utilizing four pillars of TCFD.

SSGA emphasizes the importance of effective risk management and oversight of issues a company deems material and expects it to manage risks and opportunities that are industry-specific and have a demonstrable link to long-term value creation, while providing high-quality disclosure of its processes to shareholders.

SSGA seeks to engage with companies to better understand board oversight of material risks and opportunities that may impact business and operations. Further, SSGA may consider voting against directors if it determines that a company has failed to implement and communicate effective oversight of material risks and opportunities.

Georgeson’s Perspective

Like recent revisions made by BlackRock, Vanguard, and Fidelity to their respective policies, these updates by SSGA may be reflective of an evolving policy position to review individual company and investing funds’ circumstances more holistically, on a case-by-case basis. It underscores the need for a company to provide more robust and relevant disclosure to emphasize steps it has taken to mitigate material risks relevant to its industry or specific to the issuer. Georgeson believes there has been a trend to emphasize board oversight and disclosure of material ESG-related risks and opportunities based upon policy updates from large institutional investors this year. While there may not be a one-size-fits-all approach for managing ESG-related issues, there seems to be a heightened sense of investor expectations regarding the board’s role to establish and maintain an appropriate governance structure to effectively assess, manage, and disclose on material ESG-related risks and opportunities. Georgeson recommends that issuers focus on continuous improvements to disclosure, which for material risks would include the establishment of meaningful targets that are well-defined and accompanied by robust and annual reporting on their progress.

 

This notice is provided by Georgeson for general informational purposes only and is not intended and should not be construed as legal, regulatory, financial or tax advice. Georgeson is not licensed or authorized to practice law in any jurisdictions and hence does not provide any legal advice and it does not hold itself out as doing so. Neither Georgeson nor any of its affiliates or contributors accept any responsibility or liability for the quality, accuracy or completeness of any information contained in this notice. It is important that you seek independent professional advice relating to the subject matter of this notice before relying on it.