Background

It is widely accepted by way of empirical research and good governance standards that diversity helps create long-term shareholder value.1 The belief behind this is that a group of individuals from a diverse range of backgrounds are more likely to make stronger decisions and avoid the dangers of ‘group-think’.

It is also good business sense that company board members, as well as possessing expertise in key risk areas such as legal and financial, should be able to relate to the company’s clients. Diversity is also a lead indicator of wider corporate culture. Too often we have seen companies fail or make poor decisions when the board is populated with directors unwilling or unable to challenge a single domineering personality.

Our Objectives

Diversity engagement and voting policy

Female participation in the global workforce is unequal, and a key area of inequality is in senior corporate positions. Women occupy just 25% of board seats in MSCI World Index companies.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 2020.

Our first-hand experience of performing company research has also found that company disclosure on diversity is poor. This includes basic workforce statistics and details on 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 are also likely to suffer.

We do not just see this is a risk to shareholder value as we discuss above, but we believe that enabling gender equality at all levels of society is the responsibility of companies and their investors. For example, research by McKinsey Global Institute found that increasing female participation in the workforce could increase GDP by $12 trillion by 2025.3 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 we are focusing on two objectives where we believe the most shareholder value lies, and where we can have the most influence as investors:

  1. Encouraging companies to increase the participation of women at senior levels by growing the pipeline
  2. i) Where a company has a diversity strategy but disclosure is poor, encouraging the company to improve disclosure;
    ii) Where a company has no diversity strategy, encouraging the company to develop one and disclose it

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:

  1. 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. We expect to find this on the company’s corporate website, its careers page and in its annual report (or corporate social responsibility report).
  2. 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 look 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 as a consideration in the board member nomination process.
    We firmly emphasize that 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. We also appreciate gender is not the only measure of diversity; however, it is the only one universally disclosed at board level, and therefore the only one on which we can vote at present.

Voting Action Scenarios

  1. 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 in future years if we see insufficient progress.
  2. 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:

  • Industrial business (AGM, March 2020): We voted against the chair of the nomination committee owing to insufficient board diversity and no robust policy or targets in place to address this issue.
  • Online retailer (AGM, May 2020): We supported three resolutions related to improving disclosure around diversity where a lack of disclosure currently exists and potential controversy is present.
  • Home improvement retailer (AGM, May 2020): We supported a resolution asking the company to prepare a report on diversity which would include diversity statistics and initiatives.
  • Transport operator (January 2020): We met with the company to discuss diversity and inclusion, which brought to light a number of pragmatic and interesting business practices aimed at improving culture and talent retention. However, we stressed the importance of enhancing public disclosures on such practices, otherwise they cannot act as a means of competitive advantage when seeking to attract talent.
  • Home construction company (AGM, March 2020): While we voted against the chair of the nomination committee in 2019 owing to a lack of board gender diversity and a lack of overall disclosure on workforce diversity, following positive engagement with the company we did not repeat this action at the 2020 AGM. The company explained to us that it is actively seeking to add a third woman to its board, and was very receptive to our encouragement to improve disclosure.

See, for example: https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters
2 Women on boards: 2019 Progress Report, MSCI (https://www.msci.com/documents/10199/29f5bf79-cf87-71a5-ac26- b435d3b6fc08), December 2019
3 How advancing women’s equality can add $12 trillion to global growth, McKinsey Global Institute (https://www.mckinsey. com/featured-insights/employment-and-growth/how-advancing-womens-equality-can-add-12-trillion-to-global-growth), September 2015

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