On the eve of International Women’s Day last Tuesday, State Street Global Advisors, which manages some $2.5 trillion in assets, signaled its solidarity with the day’s demonstrators. The company installed a roughly 50-inch-tall bronze statue of a defiant girl in front of Wall Street's iconic charging-bull statue. The reaction to the statue, which was designed by artist Kristen Visbal, was immediate and powerful.
The statue is a powerful symbol, but there is also substance behind it. Fearless Girl is part of State Street’s campaign to pressure companies to add more women to their boards. The firm followed up the installation with a letter to the thousands of companies that can comprise the Russell 3000 index on Tuesday asking them to take action to increase the diversity on their boards. There is room for improvement: State Street says that roughly a quarter of the 3,500 companies it sent letters to have no women on their boards.
There’s an irony to this. The fund managers at State Street don’t pick stocks. As such, State Street is what’s known as a “passive” manager, meaning that all its various funds track the performance of indexes. As a result, its managers don’t have the ability to choose not to invest in a particular company: They do as the index dictates. In recent years, as more and more money has gone into passive funds, there’s been a burgeoning worry that it is undermining the power that investors have to shape society; one widely circulated report put out by the money-management firm Sanford Bernstein was titled “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism.” (Sanford Bernstein, of course, is an “active” manager.)
Commissioning Fearless Girl is not a particularly passive move. Indeed, as State Street demonstrates, the perception of passive managers as being hands-off isn’t quite accurate. State Street, which is the investment arm of the Boston-based financial firm State Street Corporation, has a long history of engaging with companies on corporate-governance issues, although they usually do so in a very quiet way. Indeed, Ron O’Hanley, a longtime investment-management executive who became the CEO of State Street Global Advisors in 2015, says that one reason he took the job was because of State Street’s ability to influence the way companies are run.
The most potent weapon that firms like State Street wield is their ability to vote the shares they own in a company against the company’s existing board of directors. So their engagement can have real consequences. Recently, I spoke to and emailed with O’Hanley and State Street about why the company is pushing for diversity. The conversation that follows has been edited for length and clarity.
Bethany McLean: What was the genesis of Fearless Girl?
Ron O’Hanley: We have an ongoing corporate-stewardship campaign that works in conjunction with our investment process. Since we are a predominantly passive investor, we don’t have the ability not to own a company, so we spend a lot of time on measures like diversity and effective, strong board governance. That includes diversity of thought and gender diversity. What has been frustrating is that there is a growing body of evidence that creating diverse boards does result in better outcomes.
Our view is also that we should be transparent about what we’re looking for. We don’t want to be passive and not say anything—and then vote against you! So we are very transparent. Because in our mind there is incontrovertible evidence about the benefits of diversity, we felt that we needed to be more categorical about that with companies. But we also tend to not like checklists. We like broad principles.
With the statue, we were very focused on wanting to send the right message. The artist, Kristen Visbal, was terrific in trying to understand what this commission was really about. Early renditions had a more confrontational pose. But the point was not that—it was not “You versus me.” The point was that where there once was just a you, now there’s a me, and we’re here together. I’m getting a little intergalactic on you! Sorry.
McLean: Diversity, or the lack thereof, is an ongoing issue. Why did State Street decide to act now?
O’Hanley: I was scheduled to give a speech on corporate governance. It just happened to be on the eve of the International Women’s Day. We work closely with our advertising agency, and they said, “Gee, do you want to do something around International Women’s Day?” “Let’s do it,” we said. So we came up with this idea together. The statue is very much about reinforcing the message.
McLean: You mentioned frustration. Can you explain that?
O’Hanley: There has been progress made in diversity overall as well as diversity on boards. I don’t mean to suggest no one is doing anything. A lot of companies are working very hard. But we are frustrated because a quarter of the Russell 3000, and these are the biggest companies in America, have no women board members. We don’t know what the right number is, but diversity of thought is a good thing, and our sense was that we needed to be a little sharper. We didn’t just want to say words. What we are saying is that we will be looking at this and it will be negative for you if we walk away feeling like you are not taking any steps.
McLean: What would you do if you do see a lack of action?
O’Hanley: What you can take away is that if a company did nothing, there is a possibility that we would vote against the slate of directors the company proposed.
McLean: That’s a pretty big step, and not one you see many traditional money managers taking. What would get you to that point?
O’Hanley: The overarching principle of stewardship means effective board leadership. Process is an important part of that. If our team walked away thinking that there was no concerted effort to have a diverse slate of board candidates, no effort to take that extra step, like hiring a search firm to look for candidates, that would be evidence to us of a lack of process.
McLean: There’s a broader question here about the role of so-called passive managers like State Street. How active should you be in shaping corporate governance?
O’Hanley: We talk about that all the time. Our institutional clients that are focused on this are the more sophisticated pension funds. They get that we can represent a large amount of the capital deployed in particular companies, and it is permanent capital. We can’t walk away. So they are with us. You add up every company in all of our indexes, and you get 9,000 companies. We can’t be active in all of them. But we focus on one large sector in a year where we do a deeper dive.
We have always had a stewardship approach, but if anything we have escalated it now, because we see what’s happening with the move from active to passive management. That puts more responsibility on passive managers to be paying attention to a lot of things.
McLean: When it comes to boardroom diversity, where do you want to be in a year?
O’Hanley: If you had asked me a week ago I would have had a different answer. There would have been a lower bar. But clearly, Fearless Girl has gotten a lot of attention and so she has already been very constructive.
In a year, we would like to see a significant change in the dialogue at companies with very low to no gender diversity. We would like to hear that there’s a real effect going on here. You might say that’s just talk. But companies take stewardship and governance conversations as seriously as those they have with any other kind of investment analyst. They don’t want to make promises they can’t keep because we will be back in a year. We always check in with any company that we have had any engagement with. They know we are not going away.
In two years we would like to see real movement on the metrics. We would be incredibly disappointed if we didn’t see progress. But the great unexpected benefit of Fearless Girl is that already the tone of the meetings we are having has changed dramatically because of her. Those companies came in talking about what they could do. We didn’t even have to ask.
McLean: Is gender diversity a data-driven issue for you—as in, more diversity equals better corporate performance—or a moral issue, or both?
O’Hanley: For me, my belief in the importance of stewardship goes back to repeated financial crises, starting with Enron in 2001. The widespread belief was that the investment world had let down customers and clients, whether it was Enron or Worldcom or others from that era. There were governance issues we should have understood.
My feelings on this became a lot stronger during the financial crisis. People were asking, “How did you guys let this happen?” We could have done a lot more. So my interest in stewardship precedes my time at State Street. One big part of my attraction to coming here was that State Street Global Advisors does have this whole dedicated corporate-governance arm.
For a long time, I had a view that the most important thing a leader could do was encourage diversity of thought. My first executive role was at what was then Mellon Asset Management. An interesting turning point came when we bought Newton Investment Management in 1998. The acquisition was very rocky. There absolutely was not a meeting of the minds on leadership. Their team walked out on July 4, 2001—they picked that date on purpose. I knew it was possible they’d leave, so I was already thinking about how to replace them. I’d become convinced the right person was a woman, not because she was a woman but because she was the right person. She was a fixed-income manager, not an equity manager and she wasn’t as senior as others but she did a phenomenal job. It was a reminder and a reinforcement of this idea that you need diversity of thought. If we’d gone with the obvious choice, the man who was next in line, we would have gotten more of the same.