State Street asks boards to focus on corporate culture

State Street Corp Updates

State Street Global Advisors calls on boards of directors to review their company’s culture and explain its alignment with their strategy, in the latest example of large investors focusing on intangible factors as a way to create long-term value.

The world’s third largest asset manager has written to independent chairmen or senior independent directors of over 1,100 companies in the S&P 500, FTSE-350 and equivalent indices in Australia, France, Germany and Japan.

The letter by Cyrus Taraporevala, Managing Director of SSGA, explains how directors can assess, influence and report on their culture and said they should expect to answer questions from SSGA on this in the coming year.

It builds on letters from previous years dealing with sustainable development, director independence and gender diversity on the board. Rakhi Kumar, head of SSGA’s asset management team, said the letters resulted in noticeable changes in board behavior.

It also follows letters sent over the past 18 months by BlackRock and Vanguard asking companies to explain what social purpose they serve and outlining a stronger position on environmental, social and governance issues, including disclosure of climatic risks they face.

“Intangible assets determine the bottom line,” Mr. Taraporevala said in an interview. “They are becoming more and more important as more of the world moves towards a new economy,” in which companies whose brands carry more weight than their material assets increasingly focus on managing their assets. their “human capital”.

“Over the past few years, we’ve seen downsides when culture isn’t aligned with strategy,” he said. But SSGA had found that most directors were unable to properly express their company’s culture or show how they manage it.

The corporate culture was difficult to measure, admitted Mr. Taraporevala. He pointed to research by accounting firm EY, initiatives such as the Embankment Project for Inclusive Capitalism and others, which found that these intangibles now play a greater role in long-term value creation than tangible assets. .

Ms Kumar noted that the UK’s Financial Reporting Council formalized last year the role of the board of directors in aligning a company’s culture with its purpose, values ​​and strategy in the new code. UK corporate governance.

“The UK code often has a ripple effect on the market,” she said. “What appears in the UK today will often be seen in other markets over the next five years.”

Mr Taraporevala said he feared the letter might be “mistakenly seen as we try to impose our values” on the companies in which it invests. But he described the initiative as a matter of “value, not values”.

The letter comes after State Street announced plans to lay off 15% of its senior executives. The company was in the midst of a “strategic transformation,” said Taraporevala, in which culture and human capital played a role.

“I would describe the culture as very customer-centric; a deep fiduciary culture; a collegial culture. It’s a bit, frankly, cautious. But I think where we operate, the culture is to become leaner and performance driven, amplifying results.

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