Comply or explain: ISG principles get real

State Street Global Advisors on the corporate governance principles

State Street Global Advisors (SSGA) announced this month that they have been screening S&P 500 companies for their compliance to the ISG Corporate Governance Principles. The exercise will lead to engagements with companies to better understand the reasons for non-compliance, and was announced to companies in its portfolio via a Letter to Boards of Directors. Rakhi Kumar, SSGA’s Head of ESG Investing and Asset Stewardship, discusses the details.

We’ve identified close to 70 companies that we will be engaging with throughout the year” – State Street’s Rakhi Kumar

“Part of our stewardship responsibilities is to encourage adoption as well as compliance with the ISG principles, an initiative that we led,” she said. The principles were developed last year by surveying the governance principles that already existed in investors’ proxy voting guidelines. Kumar said that SSGA linked up its proxy voting guidelines with the ISG principles, and identified 13 core guidelines. “We haven’t been clear about what the 13 guidelines are,” she said, “because we don’t believe in a check the box approach, we’d rather companies took a comply and explain approach, which is a new concept in the US”. The screen has already identified target companies. “We’ve identified close to 70 companies that we will be engaging with throughout the year,” said Kumar. “These are outlier companies, defined as companies that don’t comply with three or more of the guidelines.”
The ISG principles are beginning to be adopted by corporations, with several companies indicating to SSGA that they will be including their level of compliance.“What we have seen,” said Kumar, “is some companies putting out compliance statements with the ISG principles in the proxy statement, for example Regional Financial.” Other companies that have said they will indicate compliance have yet to publish their proxies. Stressing the check the box approach, Kumar added: “We really want boards to have a discussion about the governance structure that they use. We don’t have a specific format that we would like companies to disclose their compliance with the principles in; though if we see something that we really like, we will note that as best practice.”
I asked what would happen if SSGA had engaged with the company over a couple of years and they hadn’t moved their compliance. “If we can’t get a rational explanation as to why they governance structure differs from the principles,” answered Kumar, “the next step would be to vote against the members of the nominating and governance committee.”
So if the company can put forward an acceptable argument as to why they are continuing in the noncompliance and taking a different stance, in general, are you happy to accept that?
“There are a few things we really don’t like, but governance is not a black-and-white concept,” said Kumar. “There’s a lot of grey. On the other hand, one black-and-white concept would be one share one vote; though we might accept a new IPO with unequal voting rights if it had sunset provisions, because that’s a more pragmatic approach. But noncompliance might also lead us to support a shareholder resolution which was attempting to bring the company into compliance.
“What I want to make clear here is that we’re not going to engage only when there’s a shareholder resolution on the proxy, we are actively engaging with our portfolio as an index fund. This is an approach we believe in and we think the Fearless Girl campaign has had more effect than anything an active manager could have done.”