There’s a small concentration of American companies that have literally ruled the market—and in some ways ruled the world—for the past 10 to 15 years. Some of the behavior around some of those companies has been very questionable, like Facebook. What’s your take on that kind of Silicon Valley culture and what it’s wrought?
Taraporevala: There are few companies that, over long periods of time, using your quote, continue “to rule the world.” We actually see creative destruction—to use the Schumpeter-ian phrase—is very alive. If you go back and look at who were the largest companies a while ago, who are the largest companies today, without naming names I think you would see tremendous turnover. So there’s a small subset who actually do continue to be successful over long periods of time and, by the way, even that number continues to narrow. So the fact that there are some companies that may be at the top of their game today, if they’re behaving in irresponsible ways—and I’m not agreeing or disagreeing on a particular name with you—they’re probably not going to make it over the long term.
We’re investors for the really long term on behalf of our clients. This is not a trade. If you were a trader you might actually see the world differently. If you were there for a nanosecond or for one quarter, maybe it doesn’t matter. But if you’re there as a long-term investor, if you said you were gonna own that stock forever, bear with the hyperbole, you probably care a lot, at least about social license, right?
At core, this is why culture is such a big deal for you. Because you’re literally never going to sell until it drops out of the index.
Taraporevala: Yeah, but it’s not just on the downside. It’s also the positive. I don’t just want to frame culture on the downside—I know it often gets sort of tied up with scandal. We think that it’s as much on the upside. If the culture and the strategy are really aligned, you can really move mountains as a company and as a team. So it’s both sides of that.
Kumar: I want to just add we as index investors have long memories, and we adapt to the risks that keep emerging, right? So one of the important risks for us is ethics and user privacy, especially [when it] comes to IT companies, online companies.
We are more cognizant of the fact that [for example] if your business model is based off a tax break or not paying taxes, the music is going to stop at some point. In the past, I would say even internally we would have debates whether, you know, going into a tax haven is a good thing. And everybody would say, “Of course, because you’re going to get a better return.”
Today, I’m not sure most of our portfolio managers would say it’s a good thing because they know that you can have regulation and you can have fines if you’re found to be very aggressive on your taxation if laws change. So in some ways, when you take a longer time horizon viewpoint you really start thinking about issues which were a given—low tax is good—as how are you earning? What are you doing to get that low tax? Is it going to create reputational issues for you? Is it going to have regulatory issues that will eventually be a cost to the company and margins?
I can tie that back to why boards are feeling a lot of pressure because the world is shifting. It’s shifting for us. It’s shifting for them. Just because you make money today doesn’t mean you can make money tomorrow if it’s not within the construct of how most people make money. That arbitrage goes away very quickly.
Shifting gears for a second, before he died, Jack Bogle wrote in The Wall Street Journal that he was beginning to become concerned about the concentration in the investment community around a few huge firms and their overwhelming power in the market. What’s your take on that? Do you share the concern and why or why not?
Taraporevala: So first and foremost, may he rest in peace. He was truly a pioneer and a giant amongst us, so I’d be remiss if I didn’t just start by talking about that.
I’ve read that piece multiple times and I think, if you get below the headline, there are a couple of things Mr. Bogle was absolutely highlighting, not today necessarily, but over a long period of time, his concerns. He went through and actually had a series of potential cures or remedies, and then if you actually read it carefully, he himself rejects most of them as either impractical or that doesn’t work or that makes no sense. There are a couple, though, which he sort of highlights and says you might want to do those or should do those, and we would actually completely concur.
One of them is transparency. So we actually are very transparent. The fact that we send a letter out to 1,200 chairs of boards in advance saying this is a topic we want to engage with you on is a version of transparency. Once a year, we publish our asset stewardship report, which talks about all the stuff we’ve done for the year. We even have a full record of all our votes, all of them, available online. So that’s pretty transparent. We do believe very strongly that we vote the chairs ourselves with our opinions and not rely on proxy advisors. That’s another difference. So go back and read Jack’s thing and the bunch of bullet points there and see the ones that he actually says are viable remedies. We can go with most of them, if not all of them.
The fact that you decide to highlight X, or BlackRock decides to highlight Y, there’s definitely an enormous finger that goes on the scale. From that 30,000-foot view is that a little bit worrisome, that concentration of power within our system?
Kumar: I think you have to worry about it if it’s being abused. I think the question boards need to ask is would they prefer having a State Street or BlackRock have that power, or would they prefer having a proxy advisor have that power?
That’s the reality. The reality is we are raising issues, and we are patient. We don’t name and shame. None of us do. We think of engagement and impact. How do you get impact? It could be through engagement or voting. And what’s the best impact? If you have it through dialogue, right? We don’t want to use the vote. We prefer having conversations and understanding perspectives, and we accommodate for different viewpoints.
Taraporevala: We’re the ultimate patient long-term capital, which I think most boards should view as a positive. We are not in and out of a stock. It’s really important what Rakhi said. We are not about naming and shaming. This is not about gotcha. This is about telegraphing in advance what’s important to us. It’s about having that dialogue over multiple years. Ultimately, if we just see no progress we will use the vote. But that’s not the first lever that we want to pull. It’s much more around actual engagement with companies.