It is now widely understood that diverse groups make better decisions because they are less likely to suffer from the ‘group-think’ which can lead to sub-optimal decision making. More recent research goes further and suggests a causal link between greater diversity and stronger financial performance where diversity is achieved at a sufficient level and is normatively accepted.1
Diversity is a lead indicator of wider corporate culture. We are all aware of companies failing because the board is populated with directors unwilling, or unable, to challenge a single domineering personality. As investors, we may not know what goes on behind closed doors, but we still need to be able to evaluate corporate culture. Often, we glean insights into the effectiveness of a company’s decision-making processes and the health of its corporate culture from a combination of scrutinising published information and, critically, via engagement meetings.
Female participation in the global workforce is unequal, and a key area of inequality is in senior corporate positions. According to MSCI, 20.6% of directors across companies in the ACWI (All Country World Index) were female in 2020, but 17% of companies still had an all-male board.2 We do not have a full data set available to us at the management level, but we would expect similar findings. While we acknowledge there are cultural reasons which have historically prevented women from reaching senior positions in business, we do not believe this level is acceptable in 2021.
This is also the case for ethnic-minority participation, again particularly within senior levels of organisations. In 2020, the 30% Club, a campaign group which seeks to increase diversity at board and senior-management levels, expanded its targets from focusing solely on gender to also encouraging all FTSE 350 boards and executive committees to include one person of colour by 2023.3 Similar to studies on gender and corporate performance, there is evidence to suggest that ethnic diversity in executive teams is correlated to improved profitability.
Our first-hand experience of performing company research has also found that company disclosure on diversity is poor. This includes basic workforce composition data, and diversity and inclusion policies. Not only does this make it hard for us as investors to assess a company’s culture, but it also makes it difficult for prospective employees to do the same. Employees are attaching increasing weight to a company’s diversity and inclusion performance, and not only will companies which perform poorly fail to attract the best candidates available, but those companies which do not disclose their efforts will also suffer.
We see this not just as a company-specific issue, but also as a systemic one. For example, research by the World Economic Forum found that increasing female participation in the workforce could increase GDP by US$12 trillion by 2025.4 In fact, this is seen as such an important global objective that the UN has dedicated one of its Sustainable Development Goals solely to gender equality.
Therefore, in 2021 we would like to focus on two objectives where we believe the most shareholder value lies, and where we can have the most influence as investors:
- Encourage companies to increase the participation of women and diverse candidates at senior levels by growing and encouraging a diverse talent pipeline.
- Improve diversity and inclusion-related disclosures and strategies:
- Where a company has a diversity strategy but disclosure is limited
- Where a company has not developed a rigorous diversity strategy.
Our voting and engagement policy
Our policy intends to address the two objectives listed above.
As part of the research conducted ahead of a company’s AGM to inform our voting decisions, we will look at two key indicators:
- A company’s publicly disclosed diversity and inclusion policies
We expect a company to provide basic public disclosure on its diversity and inclusion policies and practices, not just in relation to gender but encompassing a wider understanding of diversity and inclusion. We expect to find this on the company’s corporate website, its careers page and in its annual report (or corporate social responsibility report).
- The gender split of a company’s board, and any other workforce data disclosed
When examining workforce data, we believe it is appropriate to split our policy geographically to account for regional differences.
At board level, in countries where we believe gender diversity can be reasonably expected, we expect to find at least 30% of board seats being held by women. In countries where gender diversity is less well established, we expect to see progress towards the 30% level and to see diversity in its widest context as a consideration in the board member nomination process.
We firmly emphasise 30% does not represent a mandatory quota, and we will judge each company on a case-by-case basis, in the context of its geography and industry, as well as any other workforce data it discloses. This will include data at various levels of seniority, beyond just board-level disclosures, and diversity data beyond gender, such as age, ethnicity, or education.
Voting action scenarios
- In countries where diversity is better established
If a company meets neither our board gender diversity criteria nor our disclosure requirements, we will vote against the chair of the nomination committee and engage with the company. If a company fails one of our criteria, we will engage to explain our policy and vote against the chair of the nomination committee where we have seen insufficient progress.
- In countries where diversity is less well established
If a company fails any or both of our criteria, we will engage to explain our policy and vote against the chair of the nomination committee in future years if we see insufficient progress.
Engagement in practice
Recent examples of our voting and engagement activity related to diversity include:
- Amazon (AGM, May 2021): We supported three proposals aimed at increasing disclosure on Amazon’s efforts at tackling gender and racial diversity within the company.
- Philip Morris International (AGM, May 2021): We voted against the members of the nomination committee as the company had not provided compelling rationale for the lower gender diversity representation at the board level.
- Novartis (AGM, April 2021): We voted for a shareholder proposal requesting the company provide quantitative data on how it tackles racial justice. The company has outlined its targets towards equal employment and increasing diversity and inclusion within its 2030 sustainability goals.
- Linde (Engagement, April 2021): We encouraged the company to think about the expansion of gender, experience and race diversity at the board level. We were pleased to hear that the company’s thinking also reflected these ideas. The company has a broader target to reach 30% females in the workforce by 2030.
- Nike (Engagement, May 2021): Following an engagement on diversity and culture last year, we were pleased to hear that Nike had set ambitious gender and ethnicity targets to 2025 and that it was working to improve its supplier diversity by investing in female and ethnic minority-owned businesses.
1 Gary Low CFA, Diversity and Alpha: Reviewing Academic Research on Correlation and Causation, September 2020.
Princeton University Press, The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy, Scott E. Page, September 2017.
McKinsey, Delivering through diversity, 18 January 2018.
IFC, Women in Business Leadership Boost ESG Performance, 2018.
2 MSCI, Women on Boards 2020 progress report, Christina Milhomem, November 2020.
3 30% Club: Ten years on: 30% club UK sets new targets, July 2020.
4 McKinsey, How advancing women’s equality can add $12 trillion to global growth, September 2015.
World Economic Forum, The $12 trillion incentive for closing the gender gap, June 2016.
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