Index funds came about because people realized that on average, active selection by investment managers does not add value. If you can't pick out the best manager before they become the best, why not just be average. A assurance of the index performance is in many cases more appealing than a chance of outperformance plus the certain risk of a higher fee. Index funds track the index and minimize your fees - theoretically maximizing your expected value.
While indexing may be academically sound, it does not make for a very exciting investment thesis. Having a manager scour the earth for good deals or hidden gems sounds more intriguing. If your index fund cannot add value by selecting the next big thing, advocating for positive change at the companies in the index is one of the only routes for them to add value.
There is a gentle type of activism that every individual investor can practice, and that is voting. Every year companies (well, except Snapchat) ask shareholders to vote on a few issues, including who sits on the board of directors. While this is mostly dull and predictable, it is an opportunity to voice opinion. Individual investors can vote for a director that has been particularly good for the company, or vote against one they don't think is leading the company on the right path.
Holding a few shares out of millions does not really give you much say. State Street, on the other hand, owns a lot of shares. They own around 4% of many major companies like Apple, Kroger and GE. While this is not enough to have the final say, it is certainly enough to sway a close vote, and enough to start building momentum amongst other large shareholders.
A growing body of academic research points towards diverse boards making better decisions in the long run of the company. When you have people from different backgrounds approaching the same problem, you are bound to get more solutions to choose from. When analyzing risks that a company faces, this is even more important. Adding women and minority directors to a board should bring a larger pool of ideas to the table. With more ideas to choose form, you can find a better idea.
With index fund managers having very long time horizons (they must hold the stock until the company is booted from the index!) this alignment of interest makes sense. Board diversity is something that takes time to take root, and index funds have time to wait.
While this may be partly a marketing move on the part of State Street Corp, it may be a welcome trend that benefits investors more broadly.
