In a letter sent out to board chairs, State Street Global Advisors (SSGA) Global Chief Investment Officer Richard Lacaille stated that the $3 trillion asset manager will begin asking companies in its investment portfolio to articulate their risks, goals and strategy relating to racial and ethnic diversity, and to make relevant disclosure available to shareholders.

Lacaille writes that SSGA believes that the single most important driver of long-term value is a strong, independent and effective board exercising high-quality oversight. The firm has focused in the past on diversity issues at the workforce and board levels, concentrating primarily on gender diversity. SSGA has now expanded that focus to include exploring ways in which in racial and ethnic diversity impacts the firm as investors.

In the letter, Lacaille writes:

“As long-term investors, we are convinced that the lack of racial and ethnic diversity and inclusion poses risks to companies that senior managements and boards should understand and manage. The risks that can arise from having a homogeneous board and workforce are well understood and drove our focus on gender diversity years ago. Research demonstrates the tendency for groups composed of people from similar backgrounds to refrain from challenging prevailing views, as well as the positive impacts that diverse groups can have on improved decision making, risk oversight and innovation.”

Beginning in 2021, SSGA will ask portfolio companies to provide specific communications to shareholders in the following five key areas:

1. Strategy:

Articulate what role diversity plays in the firm’s broader human capital management practices and long-term strategy.

2. Goals:

Describe what diversity goals exist, how these goals contribute to the firm’s overall strategy, and how these goals are managed and progressing.

3. Metrics:

Provide measures of the diversity of the firm’s global employee base and board. For example:

  • Workforce- Employee diversity by race, ethnicity and gender, broken down by industry-relevant employment categories or levels of seniority, for all full-time employees. In the US, companies can use the disclosure framework set forth by the United States Equal Employment Opportunity Commission’s EEO-1 Survey. Non-US companies are encouraged to disclose this information in alignment with SASB’s guidance and nationally appropriate frameworks.
  • Board Level- Diversity characteristics, including racial and ethnic makeup, of the board of directors.

4. Board:

Articulate goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company’s workforce, community, customers and other key stakeholders.

5. Board oversight:

Describe how the board executes its oversight role in diversity and inclusion.

Additionally, SSGA will ask portfolio companies to assess the barriers to entry and impediments to recruitment and retention of diverse talent, especially at senior levels, while encouraging them to take steps that ensure that diverse talent pools are sourced, supported and developed.

Lacaille continues that racial and ethnic diversity will be part of SSGA’s engagement conversation, stressing that engagement will remain the asset manager’s primary tool for working with companies and boards. He warns, however, that the firm is prepared to use its proxy voting power to hold companies accountable for meeting expectations.