SSGA declines activist role in corporate governance

Amid Enron and WorldCom, this $808 billion fund manager is wary of taking judgement.

When you are responsible for $808 billion of assets under management, you have to be careful. This is the message from John Serhant, one of State Street Global Advisor's four Boston-based vice chairmen, who was passing through Hong Kong recently to meet with clients and took some time to chat with FinanceAsia.

With the US financial markets rocked by one scandal after another, from Enron to Adelphia to WorldCom, some fund managers are lobbying together to push reform. But SSGA has remained aloof. This is a bit of a puzzle, because SSGA is, along with San Francisco's BGI, a top index fund manager, and roughly half its AUM is passively invested. That means that it is required to hold even bad companies simply because they are in the index.

"We own 2% to 3% of all the major companies in the world," Serhant says.

But the firm shies from trying to tell these companies how to behave. "Historically, we have not been activists," he says. "We have not taken a view on issues such as executive compensation. We're not out leading the charge."

In part this is because SSGA really does have a history to speak of; the double-A rated firm's roots date back 210 years. With such a long-term perspective, SSGA has always been uncomfortable with government-imposed solutions designed to drive greed out of the market. For example, Serhant questions the value of mandating quarterly reporting by companies, noting it forces managers to respond to investors' demands for regular boosts to the share price, often at the expense of the company's long-term strategy.

What guides the venerable institution, he says, is the top management's personal integrity, and it is only this benchmark by which SSGA judges corporate wrongdoers. "The government should make sure that if the regulations are violated, people should go to jail... Some senior executives and managers of Enron should go to jail. If they do time, there will be less of this sort of thing."

SSGA has reacted to recent events, of course, by taking greater interest in reading company reports and understanding the footnotes. "Market participants forgot that balance sheets matter and that footnotes provide disclosure," Serhant says. "There is a whole generation of young people in business who only saw stocks rise and considered that a birthright. We've all had a lesson. But the problems were not so much caused by corporate governance issues as by a media æinvestotainment' machine."

He continues: "My philosophical difference is this: I know how hard it is to manage a company and I know the kind of information I need to do it. I can't micromanage other companies. SSGA has no social or political agenda because we don't want to create a long-term harm to our investments. Some activists may be in the right, but leadership of activists can change. I don't want to impose my view on others so our governance is just macro. It's not about me but about what benefits the participants of pension plans."

Serhant says this does not mean SSGA turns a blind eye to corporate shenanigans. He not only talks about having a æbuy' discipline and a æsell' discipline, but also having an æownership' discipline, such as promoting the concept of one-share, one-vote at annual general meetings.

Increasingly the firm finds itself having to consider alternative viewpoints by dissident shareholders, involving disputes from Hewlett Packard to Tokyo Style.

But overall SSGA is not keen to get involved in class-action suits in the US or to oppose large pay packages for corporate executives. It is more interested in working behind the scenes to find ways to align manager and shareholder interests.

By SSGA standards it has taken a dramatic step by declining to support former Enron board members sitting on other boards of directors, making it a blanket rule so as to not point fingers at individuals. Serhant is reluctant to cast judgement on managers.

"CEOs have responsibilities for huge companies and tens of thousands of employees," he says. "So they deserve large pay packages. Mike Milken did great things, that man had insight. One day he cheated so he went to jail. While I hold him accountable for those illegal things he did, I can still value his intellect and his ability."