As CEO of State Street Corp., Ronald O’Hanley is on the front lines of shareholders’ push to bring change to corporate boardrooms.
State Street, whose money-management arm oversees $2.7 trillion in assets, has amassed significant governance power in recent years as investors shifted more money into the lower-cost, index-tracking funds it helped popularize—and away from actively managed funds. One of its most visible efforts has been its “Fearless Girl” campaign urging companies to add women to their boards.
Since 2017, State Street has put about 1,350 companies around the world on notice for not having a single female director. Some 580 have since added at least one woman to their boards or promised to do so. Last year, State Street voted against the re-election of board members at 667 companies that hadn’t. Yet, big passive-investment managers like State Street have also drawn scrutiny from some shareholder activists, who argue they aren’t doing enough to make corporate boards accountable for their diversity efforts and issues such as executive pay.
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Mr. O’Hanley has seen the industry’s transformation from all angles. After stints at McKinsey & Co., Bank of New York Mellon and Fidelity Investments, he became head of State Street’s investing business in 2015. Elevated to CEO last January, he also oversees the firm’s core business: managing accounting and administrative functions for many of the world’s biggest investment firms.
Mr. O’Hanley sat down with The Wall Street Journal in New York. Here are edited excerpts:
WSJ: Some question how independent companies can remain when they’re owned by the same handful of large index-fund investors. What happens as passive investors like State Street become even bigger shareholders?
Mr. O’Hanley: It’s almost inevitable when you see this kind of concentration that it probably will make sense to do something about it or the regulator is going to step in. The idea of forcing the underlying beneficiary [investing in passive index funds] to vote just won’t happen. Nobody’s going to want to bear the proxy costs. One potential solution is to have the voting be at the fund level as opposed to the aggregated asset level. My view is we should be open to change on this.
WSJ: State Street’s internal practices have come under scrutiny as you’ve taken up the issue of more women on boards. Months after the firm launched its Fearless Girl campaign, it agreed to pay $5 million to settle Labor Department allegations that it paid female and black employees less. How have you navigated those challenges?
Mr. O’Hanley: It’s forced us to hold up the mirror to ourselves. Our board spends a lot of time on this. When State Street Global Advisors issues proxy voting guidelines, our board is one of the first readers. For example, there’s been a real emphasis on the importance of corporate culture. Now we’re asking that question about ourselves.
WSJ: State Street has used its proxy voting muscle to pressure all-male boards to add at least one woman. Should you be pushing for more than that?
Mr. O’Hanley: One is certainly not enough. There’s a fair amount of research out there that shows that if you’re one of a type in a group, it’s hard to speak up. For us, it’s about keeping up the drumbeat with boards that this is something that’s important to us and that we value the diversity represented by gender equity and other kinds of equity.
WSJ: California now mandates that boards of publicly traded companies based in the state have at least one female director. How do you feel about that?
Mr. O’Hanley: There’s a little part of me that wishes it didn’t come to that, but if that’s what it takes to get the last ones going, then I’m OK with that.
[But] that great sucking sound is the number of public companies leaving the capital markets. I always get concerned about rules and regulations that are applying to public companies, not private companies, as being yet another reason companies don’t want to go public.
WSJ: How did the 2008 financial crisis influence your management style?
Mr. O’Hanley: Most financial firms mark themselves “before crisis” and “after crisis” in terms of their level of sophistication. The deeper lessons out of the crisis, though, are really about how you communicate with your team.
You have to be honest and transparent with them. If you lie to them, they’re going to know it right away. You also have a role of building and instilling confidence in them. That’s a fine line to travel. Like a lot of other firms [during the crisis], we were watching the kind of pounding that our money-market funds were getting through no fault of anybody inside. The nuclear option of shutting a fund was on everybody’s mind. We said, “We have to be prepared for this.”
WSJ: What’s another corporate-governance priority for you?
Mr. O’Hanley: Climate is the one I’m personally most interested in. There’s the obvious kind of climate risk examples, [such as] shoreline real estate or any kind of business, population that’s down around the coast. Another risk is for those companies that have assets and income statements based on fossil-fuel production or utilization.
This has always been a challenge for investing: to not just be focused on what’s in front of you, but what is the second-, third-, fourth-order effect of phenomena happening out there.
Write to Justin Baer at justin.baer@wsj.com
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2019-12-25 13:03:00Z
https://www.wsj.com/articles/state-street-ceo-takes-the-long-view-on-shareholder-activism-11577278998
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