FCLTGlobal’s Sarah Williamson, CEO, and Matthew Leatherman, Director of Research, recently sat down with Ronald O’Hanley to discuss the importance of long-term investing and the role of the board in affecting long-term change.
FCLTGlobal’s Sarah Williamson, CEO, and Matthew Leatherman, Director of Research, recently sat down with Ronald O’Hanley to discuss the importance of long-term investing and the role of the board in affecting long-term change.
FCLTGlobal’s Sarah Williamson, CEO, and Matthew Leatherman, Director of Research, recently sat down with Ronald O’Hanley to discuss the importance of long-term investing and the role of the board in affecting long-term change.
Ronald O’Hanley is President and CEO of State Street Global Advisors, the investment management arm of State Street Corporation and an FCLTGlobal member.
Sarah Williamson: What does long-term investing mean in a State Street Global Advisors context?
Ron O’Hanley: As the third-largest asset manager in the world, we manage roughly $2.6 trillion, of which about $1.5 trillion in that company is in some form of an index.* As long as a company is in the index, we are invested. As a consequence, we represent near permanent capital in the public markets.
That long-term commitment requires a commensurate level of engagement and stewardship with companies on behalf of our clients, particularly since dis-investment is not an option. Active engagement and stewardship could be in the form of a one-on-one dialogue with boards or publishing broad principles that we believe have near universal application. Asset managers can encourage longer-term behavior by meeting with management and with the board as part of fundamental analysis.
As recently as five years ago, boards were not routinely meeting with managers. They are certainly meeting with managers now, often on a regular basis. Despite some initial trepidation, management is now pleased because it means they no longer have to serve as the translator between the board and the fund manager. And the board values the opportunity to communicate the company’s long-term strategy.
I think other asset managers can do this, too, even if they are only a 0.2% shareholder. Most management teams look across the table and see a shareholder, not a percentage, and they will listen.
Focusing on the long term is also important for managing our business. Most of our clients’ liabilities are long term, and so are the problems they are trying to solve, whether it is an individual saving for retirement or an institution trying to meet a liability. We try to run our business the same way and emphasize consistency in our corporate approach, our process, and our people.
Matt Leatherman: Institutional investors, including those with strong and sincere beliefs about the long term, aren’t always able to match their behavior to the long-term nature of their liabilities. Do you have any observations about how to do that?
Ron O’Hanley: Institutions often have liabilities that extend over decades. With that kind of long horizon, it is difficult to think in terms of: “Have I chosen the right manager?” or even worse: “Has that manager chosen the right stock?” It is much more about strategic asset allocation and maintaining reasonable diversification over the long term.
Matt Leatherman: State Street’s investments always will be broad, but engagement and stewardship also require depth. How do you think about that balance?
Ron O’Hanley: I think you’re addressing one of the biggest obstacles for investors with a long-term focus: how does one measure it and how does one know that progress is being made?
Investing for the long term requires a much more nuanced view about how assets are deployed to work. Measurement includes outcomes and the process itself and determining if companies are doing what they are saying. We are able to operate at this scale by understanding and engaging with companies about their processes for creating value. Our stewardship team chooses specific sectors or themes each year to focus on: consumer goods companies or water management issues, for example. That way we can more efficiently scale the knowledge and principles that are important to us. Our regular publications on what we are looking for in our portfolio companies also help us to extend our influence across a wide range of companies.
Sarah Williamson: We know that you have focused on the role of the board when it comes to the long term. Boards face a lot of short-term pressures and need the fortitude to withstand those. What more do you think boards can do?
Ron O’Hanley: The reason I believe so much in the board as a lever for focusing on the long term is that, in general, any given director likely will be in his/her role longer than the CEO. I think that this time horizon has to influence how the board exercises oversight.
Let me give an example.
Boards formally approve incentive; however, they are typically approving what management has put forward and believes it can control. The whole system is biased towards the short term. There are a lot of ways to drive earnings-per-share in the short term that have very little to do with creating long-term returns.
The way to overcome the bias to the short-term is for the board to establish a view and a philosophy about the long term. Then take a hard look at compensation and ensure there is sufficient incentive for the long term. Creative vehicles like restricted stock units, for instance, can adjust compensation depending on the firm’s long-term returns.
The investor’s role is to hold boards accountable for taking the long-term perspective. Even activists with very concentrated holdings cannot go to this level of detail. The board needs to raise these questions and ensure that management is thinking about these long-term factors. That is why we emphasize process when we are engaging with companies.
Sarah Williamson: What implications do these ideas have for long-term corporate management?
Ron O’Hanley: Deferral might be for a very long time. The CEO and the top management team are temporary stewards, but their actions will have a long-term impact. Why shouldn’t CEOs be penalized or rewarded, at least partially, for what happens after their tenure, especially since the investors who provided the capital often will remain after they leave?
I would add there is a parallel with activist investors. In many cases, the activists are focused on the right issue. The more common challenge is how they implement their solution and at what cost. They get very involved for a short period of time, reach their target, and then leave. Activists usually do not stay around to enjoy or suffer from some of those long-term consequences.
Rakhi Kumar, our Head of ESG Investments and Asset Stewardship, wrote about getting activists to lock up their shares. It will be hard to get them to do that for 10 years, but even three would give activists pause. I think that is a very good idea and should be pursued.
Sarah Williamson: What other interesting developments do you see on the horizon?
Ron O’Hanley: I think that focusing on the long term and ESG investing are converging. ESG represents a partial set of considerations to evaluate whether companies are doing the right thing for the long term.
In the short term, you can be completely financially focused. As you start to think about the long term, then these ESG factors become more and more important. For example, whether or not sea level rise actually will have an impact on real estate investments. It always matters if I am getting the very best management in place, one that has real diversity and real diversity of thought.
These are some of the very important considerations we consider in the context of promoting long-term value.
*As of 6/30/2017