State Street Global Advisors (SSGA) CEO Cyrus Taraporevala has sent a letter to more than 1,100 public companies calling on their corporate boards to place a greater emphasis on corporate culture, and offered a framework for implementation.
According to SSGA, an increased focus on corporate culture is essential to a company’s sustainable, long-term value creation.
“What we found is that the engagement culture in the US is starting to get very strong,” Rakhi Kumar, SSGA’s head of ESG investments and asset stewardship, told CIO. “It’s about a conversation between investors and management on issues which are not only short-term performance driven.”
In the letter, Taraporevala acknowledges that unlike its active investment strategies where SSGA can sell a company’s stock when it disagrees with management, its index-based strategies require it to own the stock for as long as it is included in the index. However, the firm still has some recourse to affect change at companies.
“We always have the proxy vote,” said Kumar. “Companies are beginning to recognize that we can be a trusted partner and someone who’s going to be there for the long haul … but outside of that, we can’t sell the stocks. We can’t make the S&P 500 the S&P 499.”
Taraporevala emphasized in the letter that the firm’s interest in corporate culture is strictly from the perspective of long-term investment value, not from any kind of political or social agenda.
“It would be political if we were making value judgments on culture,” said Kumar. “What we are saying is good culture is one that is aligned to strategy and helps you achieve strategy, and is an asset,” she said, adding that “bad culture is one that is not aligned to strategy or can hinder the achievement of a strategy. That to me is a very simple business issue.”
While Taraporevala’s letter was directed to company boards, he said that SSGA believes it is not the responsibility of the corporate board to manage a company’s culture, but it is the responsibility of senior management.
However, Kumar said that the letter was directed to board members because boards need to monitor senior management, and that boards are responsible for overseeing strategy. “That’s the point we’re trying to make,” she said.
SSGA also acknowledged that corporate culture, like other intangible assets, is difficult to measure and manage. However, in the letter, Taraporevala cites an Ernst & Young report that estimates that intangible assets such as culture average 52% of an organization’s market value, and as much as 90% in some sectors.
“Researchers have documented that in the US and UK now, more value is driven by intangible, rather than tangible, assets,” wrote Taraporevala. “However, through engagement, we have found that few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary.”