State Street’s SHE: Investing in Women Leaders

Financial returns are important, but for many companies, using capital to influence positive social outcomes is just as vital. Enter impact investing and the example of State Street’s SHE, a gender diversity index fund designed to track US companies that are leading their industries in placing women on boards of directors and in senior leadership positions. Vikram Gandhi discusses the importance of investing for impact and its potential to influence public companies.

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Conversation recorded September 6, 2017. Edited for length and clarity.

Brian Kenny: On March 7, 2017, the day before International Women's Day, a statue was unveiled in New York's financial district directly opposite the iconic “Charging Bull” that has become the de facto symbol of Wall Street. “Fearless Girl,” as the work was called, features a girl, hands on hips, chin up, confident in every way. At just 50 inches tall she courageously stares down the 11-foot-high “Charging Bull.” Within hours of its installation, “Fearless Girl” was trending on Twitter and Instagram as women of all ages posted selfies with this new icon of feminism. New York City Public Advocate Leticia James said, "’Fearless Girl’ stands as a powerful beacon showing women young and old that no dream is too big, and no ceiling is too high."

Once it became widely known that “Fearless Girl” was commissioned by State Street Global Advisory Services (SSGA) to celebrate the first anniversary of their gender diversity index fund, critics mounted an effort to remove the statue, calling it an advertising stunt and questioning the firm's commitment to feminism. So why would a financial services firm wade into such a controversial social issue in the first place? Today we'll hear from Senior Lecturer Vikram Gandhi about his case “State Street–The Development and Growth of SHE.” I'm your host Brian Kenny, and you're listening to Cold Call. (Editor’s note: The case is not currently available for download.)

Kenny: Vikram Gandhi teaches in the MBA and Executive Education programs at Harvard Business School, and he's the founder of ASHA Impact, an impact investing platform. He also spent 23 years in investment banking, so I guess you know a little bit about investment banking as well. Welcome.

Gandhi: Thank you, Brian.

Kenny: I really enjoyed this case as a marketing person. I watched the unveiling of the statue with great interest. I was a big fan of it, but I understand the controversy around it, too. Can you set up the case for us. Who is the protagonist and what is on her mind?

Gandhi: The protagonist here is Sonya Park, who is a senior sales person, an executive in State Street Global Advisors, which is one of the divisions of State Street. She is based on the West Coast and covers large institutional clients. The other protagonist is Chris McKnett, who is the head of ESG Investing (Environmental, Social and Governance) for State Street. Essentially, they had been approached by one of their large pension plan clients in California that wanted them to create an ETF, an exchange-traded fund, or an index rather than an ETF based on that index.

It … had a filter in it, which essentially brought in companies that had more diverse leadership in terms of gender leadership. This was a demand that this client had. Sonya's team then went about creating it. It was very complicated to create. This pension plan was the key investor in this ETF. The point, really, is how to expand the acceptability of this product with other institutional investors and perhaps retail investors. The whole case is really about that decision point ... How do we market and expand it? Because ultimately, State Street is in the business of creating more assets under management.

Kenny: How did you find out about this case and what led you to write about it?

Gandhi: We are launching a new course at HBS, Investing for Impact. As a result, we have to create a lot of new teaching material because this course hasn't been offered before and in fact the whole area of investing for impact is a relatively new area. We've tried to put together a variety of cases, which cover the whole gamut of investing. From large institutions to small private equity, from family offices as well as the whole spectrum of public market investing, private investing, and venture capital. State Street, in my investment banking days, was a large client of mine. Through some mutual connections I got to know about their ESG effort and got to know Chris McKnett. We got talking about the fact that having a case about a large financial institution catering to another large financial institution—the pension plan focused on a particular social issue—would be a very interesting case to write. They were very open to it, which I was thrilled about, and that's how it came about.

Kenny: You mentioned ESG and impact investing. Can you talk a little bit about the core elements here?

Gandhi: ESG is environmental, social, and governance investing. Essentially, this started with so-called negative screens where either pension plans or foundations or family offices consciously chose that, in their investment philosophy, they will not invest in things [like] tobacco, alcohol, weapons companies, or something based on religion. That was kind of a negative screen.

"The whole area of ESG today is much more pervasive in Europe"

It has a social impact or a social perspective. A lot of investors are looking at the environment and saying they want to invest in companies that are more advanced in their environmental programs. For example, pension plans have 20-, 30-year time horizons. They have to factor in [potential climate change impacts on their investments] into that investment decision today. ESG essentially is either through a negative screen, not investing in things, or through a positive screen, proactively investing in stocks that people believe in. The whole area of ESG today is much more pervasive in Europe. The latest data I've seen is that about 40 percent of assets that are managed have some sort of ESG component with them. In the US, it's close to about 20 percent.

Kenny: Why do you think Europe is more advanced in this area than the US?

Gandhi: Well, Europe has had legislation to that effect. For example, in the gender diversity issue, in some countries it's mandated that 30 percent and 40 percent, in that range, of board members have to be women. There's no such legislation in the US. Historically, too, they factored in through the pension plans, as well as other legislation on the environment, that financial returns are not the only criteria [to be considered]. There have to be some broader criteria for investments. Until recently in the US, there was a fiduciary obligation to only focus on financial returns. That's been relaxed here in the last couple of years so you're seeing a lot more institutions looking at it.

Essentially what ESG, or impact investing for that matter, says is that financial returns are important, but they're not the only criteria, and that our capital can be used to influence (social) outcomes. In this SHE case, it was this pension plan trying to influence an outcome that more women should be included in leadership of corporations.

Kenny: SSGA were early adopters of the notion of ESG.

Gandhi: Absolutely. They're an intermediary to a lot of extent. They're in a way reacting to their clients … who said we would like a gender-diversity index. They're responding to that, but they were pioneers in the Exchange Traded Fund space, which is another teaching objective of the case. They were the ones that founded the first ETS 500, which is an SMP 500-based ETF. They've been very, very big in this area and have been at it for a while.

Kenny: What kinds of objectives are they trying to achieve for the pension fund?

Gandhi: There's the Russell 1000, which is a broad index in the market, (that has as criteria) that more than 25 percent of leadership, either the board level, senior level, or senior management, are women. That is the mandate the index would like to create. While it sounds simple it's actually a highly complicated issue. First of all what is 25 percent? What does senior management mean? We've got to define these very carefully. Then how do you actually get data on every company if 25 percent of that senior management are women or not? That constantly changes over time.

Then, once you get the data, you've got to figure out, if I'm going to include the stock [in the index], how should it be weighted? You're creating an index and that's going to be weighted by different stocks based on their market caps, etc. While they did want a gender diversity index, they didn't want it to sway too far away from what you would call industry representations on the index. The Russell 1000 has a typical route that x percent is energy, y percent is technology, etc. It's interesting that once you've been through this gender diversity selection process, the least represented companies of the 10 industries that are in the Russell 1000 were energy and technology. They had to rebalance it and bring back some energy and technology companies, loosen the criteria a little bit.

Kenny: You mentioned that there's legislation in Europe where 40 percent of senior leadership has to be women. What does it look like in the US?

Gandhi: It's actually quite alarming in the US. If you look at the general employment population in US corporations, roughly 45 percent are women. You get into so-called executive leadership, it's less than 20 percent. If you get to boards, it's 19 percent, and you get to CEOs, it's 4 percent. While obviously gender diversity is an important social issue, there's also been enough studies done that (show) women actually think, behave, and problem solve in very different ways then men, and that having a diverse leadership team creates better business decisions, which ultimately should create more profits and better stock prices.

McKinsey did a study in 2015 that said that if women were given the exact same opportunity and employability as men, the GDP of the US would go up by $26 trillion dollars, which is the same as the GDP of the US and China today combined. There's a huge upside to get this right. Just from an economic growth perspective and a valley creation perspective, keeping aside the social issue.

Kenny: I also think about the rising generation of millennials. We talk a lot about the values that they have, their expectations of the places that they're going to work, and where they're going to invest their money. Do you think that will drive more impact investing and more of these kinds of funds will start to emerge?

"We see benchmarks that say that in addition to getting a return, what kind of social impact is our capital having? And that's a great trend"

Gandhi: That's exactly right. That's why this case and course is being offered here. There's just much more demand in the power of students to have this than there was 10 years ago. That clearly is a trend. You're seeing that in the family offices now. There are a couple of cases in our course that talk about family offices that have gone from zero impact investing to basically saying we want our portfolio to have 100 percent impact. We don't want to sacrifice financial return, but we're not going to invest in certain kinds of companies. Or we see benchmarks that say that in addition to getting a return, what kind of social impact is our capital having? And that's a great trend.

Kenny: You've discussed this in class, speaking of the course. What's the reaction like?

Gandhi: The reaction is positive. Last fall we did a test beta with three or four cases, this being one of them. I think people were fascinated. One, it's an experience to learn about ETFs and about ESG investing. We do spend quite a bit of time on the mechanics of how this gender diversity index was created and the nitty-gritty of that. But this whole concept of diversity and why it is not happening, which everyone talks about, but still just 4 percent of CEOs in the US are women. It's really like, why? I think that really creates a really robust and interesting discussion.

Kenny: Have you been down to see “Fearless Girl?”

Gandhi: I have. “Fearless Girl” came out after we had written the case. I think State Street … has chosen in the ESG area to focus on two areas. One is climate, one is gender diversity. From their perspective, while people can knock them for marketing etc., this is an extremely important area for them and they're going to continue to pursue it.

Kenny: [“Fearless Girl”] certainly raised awareness and visibility so you'd have to say it was a success from that standpoint.

Gandhi: Absolutely. I mean after energy and technology, the financial services business is probably next on the list for lowest participation of women in senior leadership.

Kenny: Vikram, thank you so much for joining us today.

Gandhi: Thank you, Brian. It was a pleasure.

 Read more

Conversation recorded September 6, 2017. Edited for length and clarity.

Brian Kenny: On March 7, 2017, the day before International Women's Day, a statue was unveiled in New York's financial district directly opposite the iconic “Charging Bull” that has become the de facto symbol of Wall Street. “Fearless Girl,” as the work was called, features a girl, hands on hips, chin up, confident in every way. At just 50 inches tall she courageously stares down the 11-foot-high “Charging Bull.” Within hours of its installation, “Fearless Girl” was trending on Twitter and Instagram as women of all ages posted selfies with this new icon of feminism. New York City Public Advocate Leticia James said, "’Fearless Girl’ stands as a powerful beacon showing women young and old that no dream is too big, and no ceiling is too high."

Once it became widely known that “Fearless Girl” was commissioned by State Street Global Advisory Services (SSGA) to celebrate the first anniversary of their gender diversity index fund, critics mounted an effort to remove the statue, calling it an advertising stunt and questioning the firm's commitment to feminism. So why would a financial services firm wade into such a controversial social issue in the first place? Today we'll hear from Senior Lecturer Vikram Gandhi about his case “State Street–The Development and Growth of SHE.” I'm your host Brian Kenny, and you're listening to Cold Call. (Editor’s note: The case is not currently available for download.)

Kenny: Vikram Gandhi teaches in the MBA and Executive Education programs at Harvard Business School, and he's the founder of ASHA Impact, an impact investing platform. He also spent 23 years in investment banking, so I guess you know a little bit about investment banking as well. Welcome.

Gandhi: Thank you, Brian.

Kenny: I really enjoyed this case as a marketing person. I watched the unveiling of the statue with great interest. I was a big fan of it, but I understand the controversy around it, too. Can you set up the case for us. Who is the protagonist and what is on her mind?

Gandhi: The protagonist here is Sonya Park, who is a senior sales person, an executive in State Street Global Advisors, which is one of the divisions of State Street. She is based on the West Coast and covers large institutional clients. The other protagonist is Chris McKnett, who is the head of ESG Investing (Environmental, Social and Governance) for State Street. Essentially, they had been approached by one of their large pension plan clients in California that wanted them to create an ETF, an exchange-traded fund, or an index rather than an ETF based on that index.

It … had a filter in it, which essentially brought in companies that had more diverse leadership in terms of gender leadership. This was a demand that this client had. Sonya's team then went about creating it. It was very complicated to create. This pension plan was the key investor in this ETF. The point, really, is how to expand the acceptability of this product with other institutional investors and perhaps retail investors. The whole case is really about that decision point ... How do we market and expand it? Because ultimately, State Street is in the business of creating more assets under management.

Kenny: How did you find out about this case and what led you to write about it?

Gandhi: We are launching a new course at HBS, Investing for Impact. As a result, we have to create a lot of new teaching material because this course hasn't been offered before and in fact the whole area of investing for impact is a relatively new area. We've tried to put together a variety of cases, which cover the whole gamut of investing. From large institutions to small private equity, from family offices as well as the whole spectrum of public market investing, private investing, and venture capital. State Street, in my investment banking days, was a large client of mine. Through some mutual connections I got to know about their ESG effort and got to know Chris McKnett. We got talking about the fact that having a case about a large financial institution catering to another large financial institution—the pension plan focused on a particular social issue—would be a very interesting case to write. They were very open to it, which I was thrilled about, and that's how it came about.

Kenny: You mentioned ESG and impact investing. Can you talk a little bit about the core elements here?

Gandhi: ESG is environmental, social, and governance investing. Essentially, this started with so-called negative screens where either pension plans or foundations or family offices consciously chose that, in their investment philosophy, they will not invest in things [like] tobacco, alcohol, weapons companies, or something based on religion. That was kind of a negative screen.

"The whole area of ESG today is much more pervasive in Europe"

It has a social impact or a social perspective. A lot of investors are looking at the environment and saying they want to invest in companies that are more advanced in their environmental programs. For example, pension plans have 20-, 30-year time horizons. They have to factor in [potential climate change impacts on their investments] into that investment decision today. ESG essentially is either through a negative screen, not investing in things, or through a positive screen, proactively investing in stocks that people believe in. The whole area of ESG today is much more pervasive in Europe. The latest data I've seen is that about 40 percent of assets that are managed have some sort of ESG component with them. In the US, it's close to about 20 percent.

Kenny: Why do you think Europe is more advanced in this area than the US?

Gandhi: Well, Europe has had legislation to that effect. For example, in the gender diversity issue, in some countries it's mandated that 30 percent and 40 percent, in that range, of board members have to be women. There's no such legislation in the US. Historically, too, they factored in through the pension plans, as well as other legislation on the environment, that financial returns are not the only criteria [to be considered]. There have to be some broader criteria for investments. Until recently in the US, there was a fiduciary obligation to only focus on financial returns. That's been relaxed here in the last couple of years so you're seeing a lot more institutions looking at it.

Essentially what ESG, or impact investing for that matter, says is that financial returns are important, but they're not the only criteria, and that our capital can be used to influence (social) outcomes. In this SHE case, it was this pension plan trying to influence an outcome that more women should be included in leadership of corporations.

Kenny: SSGA were early adopters of the notion of ESG.

Gandhi: Absolutely. They're an intermediary to a lot of extent. They're in a way reacting to their clients … who said we would like a gender-diversity index. They're responding to that, but they were pioneers in the Exchange Traded Fund space, which is another teaching objective of the case. They were the ones that founded the first ETS 500, which is an SMP 500-based ETF. They've been very, very big in this area and have been at it for a while.

Kenny: What kinds of objectives are they trying to achieve for the pension fund?

Gandhi: There's the Russell 1000, which is a broad index in the market, (that has as criteria) that more than 25 percent of leadership, either the board level, senior level, or senior management, are women. That is the mandate the index would like to create. While it sounds simple it's actually a highly complicated issue. First of all what is 25 percent? What does senior management mean? We've got to define these very carefully. Then how do you actually get data on every company if 25 percent of that senior management are women or not? That constantly changes over time.

Then, once you get the data, you've got to figure out, if I'm going to include the stock [in the index], how should it be weighted? You're creating an index and that's going to be weighted by different stocks based on their market caps, etc. While they did want a gender diversity index, they didn't want it to sway too far away from what you would call industry representations on the index. The Russell 1000 has a typical route that x percent is energy, y percent is technology, etc. It's interesting that once you've been through this gender diversity selection process, the least represented companies of the 10 industries that are in the Russell 1000 were energy and technology. They had to rebalance it and bring back some energy and technology companies, loosen the criteria a little bit.

Kenny: You mentioned that there's legislation in Europe where 40 percent of senior leadership has to be women. What does it look like in the US?

Gandhi: It's actually quite alarming in the US. If you look at the general employment population in US corporations, roughly 45 percent are women. You get into so-called executive leadership, it's less than 20 percent. If you get to boards, it's 19 percent, and you get to CEOs, it's 4 percent. While obviously gender diversity is an important social issue, there's also been enough studies done that (show) women actually think, behave, and problem solve in very different ways then men, and that having a diverse leadership team creates better business decisions, which ultimately should create more profits and better stock prices.

McKinsey did a study in 2015 that said that if women were given the exact same opportunity and employability as men, the GDP of the US would go up by $26 trillion dollars, which is the same as the GDP of the US and China today combined. There's a huge upside to get this right. Just from an economic growth perspective and a valley creation perspective, keeping aside the social issue.

Kenny: I also think about the rising generation of millennials. We talk a lot about the values that they have, their expectations of the places that they're going to work, and where they're going to invest their money. Do you think that will drive more impact investing and more of these kinds of funds will start to emerge?

"We see benchmarks that say that in addition to getting a return, what kind of social impact is our capital having? And that's a great trend"

Gandhi: That's exactly right. That's why this case and course is being offered here. There's just much more demand in the power of students to have this than there was 10 years ago. That clearly is a trend. You're seeing that in the family offices now. There are a couple of cases in our course that talk about family offices that have gone from zero impact investing to basically saying we want our portfolio to have 100 percent impact. We don't want to sacrifice financial return, but we're not going to invest in certain kinds of companies. Or we see benchmarks that say that in addition to getting a return, what kind of social impact is our capital having? And that's a great trend.

Kenny: You've discussed this in class, speaking of the course. What's the reaction like?

Gandhi: The reaction is positive. Last fall we did a test beta with three or four cases, this being one of them. I think people were fascinated. One, it's an experience to learn about ETFs and about ESG investing. We do spend quite a bit of time on the mechanics of how this gender diversity index was created and the nitty-gritty of that. But this whole concept of diversity and why it is not happening, which everyone talks about, but still just 4 percent of CEOs in the US are women. It's really like, why? I think that really creates a really robust and interesting discussion.

Kenny: Have you been down to see “Fearless Girl?”

Gandhi: I have. “Fearless Girl” came out after we had written the case. I think State Street … has chosen in the ESG area to focus on two areas. One is climate, one is gender diversity. From their perspective, while people can knock them for marketing etc., this is an extremely important area for them and they're going to continue to pursue it.

Kenny: [“Fearless Girl”] certainly raised awareness and visibility so you'd have to say it was a success from that standpoint.

Gandhi: Absolutely. I mean after energy and technology, the financial services business is probably next on the list for lowest participation of women in senior leadership.

Kenny: Vikram, thank you so much for joining us today.

Gandhi: Thank you, Brian. It was a pleasure.

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