Last month, Ronald O’Hanley, chief executive of State Street Global Advisors (SSGA), the investment management arm of State Street, sent a letter to board members of the firm’s portfolio companies detailing the $2.4trn investment giant’s thoughts on board leadership and board tenure.
It slipped somewhat under the radar screen, unlike a similar letter from BlackRock’s Larry Fink. O’Hanley took the helm at SSGA in 2014, after four years at Fidelity Investments. Before that he was CEO at BNY Mellon Asset Management. He is a core member of Focusing Capital on the Long Term initiative founded by the CPP Investment Board and McKinsey & Co.
The letter gives not just the fund giant’s opinions on these issues but also discloses that “over the last several years we have voted on numerous occasions to separate the CEO and board chair roles and against the re‐election of long‐tenured board members…. In other cases, after active engagement, we have determined that effective independent leadership exists with a combined CEO and chair and an independent lead director working together.”
I spoke with Rakhi Kumar, Managing Director and Head of Corporate Governance at the Boston-based investor, who told me that SSGA voted for the separation of chair and CEO at 10 out of 65 shareholder resolutions in 2015. It also voted against the reelection of 538 long-tenured non-executive directors at 380 companies globally over the same period. The firm doesn’t disclose the specific tenure figure beyond which they believe board directors are ineffective, as it would rather boards “reflect on board refreshment and director succession and how to manage the process,” said Kumar. “The preference is always for engagement, and SSGA engaged with over 45% of their assets under management in their equity portfolio globally,” she added.
While there are no absolute numbers that mark a director as long-tenured, SSGA uses an algorithm to identify problems. In 2014, Kumar wrote a paper on board tenure. In it she explains that the firm’s director tenure policy takes into consideration “average market-level board tenure” of the country of operation. Companies are screened on three criteria—average board tenure, the proportion of very long-tenured non-executive directors and classified board structures. Companies are deemed to have excessive average board tenures if they “exceed one standard deviation above the average market-level board tenure”, while directors are considered to have long-tenures if their tenure is in “excess of two standard deviations above the average market-level board tenure”. Market-level board tenure is country specific, for example only 6% of UK companies had directors with tenure of 12 years or more, compared to 20% of US companies.
The letter also addressed the issue of leadership in the light of a study SSGA conducted based on data from ISS.The study showed that even in countries where it was standard practice for the chair and CEO to be separated, like the UK, Germany and Australia, the proportion of truly independent chairs was surprisingly low: 52%, 46%, and 52% respectively. While these non-independent chairs were separate from the CEO, they were either an executive, an insider or affiliated to the company in some way. Simple non-independence, however, was not an automatic reason to vote against them. In the same way, SSGA assessed a number of chairs in both the UK and US as not particularly effective even though fully independent and separate from the CEO.
As a result of the findings from ISS and its engagement experience, the fund manager determined it was necessary to know what it should look for in board leadership structures and practices. To get to this, it built a framework that looked at governance process, job descriptions and time commitment. “This texture around effective leadership is what Ron’s letter is about,” said Kumar. “Time commitments, we found, varied from two days a week, to one day a month, with an average of one day a week.” Again, the firm does not have minimum expectations of time commitments, but would expect most effective independent chairs to be “at the average”. In addition, SSGA looked into the selection processes used to elect the chair or lead independent director, and whether there were other processes involved such as one-year rotations. “We generally disapprove of one-year rotations,” said Kumar, “because a chair needs time to develop and plan for succession, and one year is not enough time for that development to take place.”
The framework also identifies that the characteristics of a good independent chair largely center around good communications, not just with board and management but across the whole stakeholder group. “It also found that industry or other relevant experience was extremely helpful, just to aid in being able to guide the CEO,” explained Kumar. Other desirable characteristics were integrity and sound judgement. “Also,” added Kumar, “a chair is still part of the board, so while he or she needs to take responsibility for leadership as a whole that needs to be part of a team effort also. We are not trying to make the US like the UK or vice versa, rather we are determined to look at each individual case and assess its needs.” On the difference between lead directors and chairs in the US, Kumar said: “You can call the individual what you may, it all depends on what they do.”
Finally, the letter notes that the firm is “currently working with some of the world’s largest… asset owners and managers to codify principles that address not only independent board leadership, but other important corporate governance matters as well.” These principles are in “good draft form,” said Kumar, and will be published within the next six months, in September or October this year.