Transcript

So the benefits of diversity have long been acknowledged by investors, namely that it improves diversity of thought, improves decision-making and avoids dangerous groupthink. Yet despite this, companies and boards have still been too slow to react. Of the 2700 companies in the MSCI ACWI, over 1/5 of them still have all-male boards and as such, as investors, we really wanted to do something to demonstrate to the companies that we invest in that we care about diversity and we think it's important. Under our diversity voting and engagement policy, we look at two aspects of a company. First of all, we look at the number of women on the board – we’re looking for at least 30%. We completely acknowledge that gender diversity isn't the only measure of diversity, but it is the only one that all companies consistently report on and therefore it’s the only one we can really vote on at the moment. The second thing we look at is the company's diversity and inclusion policies throughout the whole business, so things like basic statistics, workforce engagement, maternity leave policies and flexible working programs. If we see a company doesn't meet our expectations in just one of those categories, we’ll engage with the company and explain that this could lead us to vote against them in the future. So the results of this policy since May 2018 – when we first implemented it – is that we voted against the chair of nomination committees at 21 separate AGMs. Now, this doesn't sound like much in the context of Newton’s 400 equities, but actually the whole point of this policy was to open up conversations with companies and show them that we’re taking diversity as a topic very seriously, and that's exactly what we’re seeing happening. In terms of seeing improved performance in terms of more women on boards and better disclosure, we do acknowledge that sustainable change is going to take time. Any company can simply hire in diversity, but what we want to see companies doing is creating a real culture and environment where diversity can actually flourish. This is just the start of our diversity voting and engagement work and we really hope that we’re going to see continued improvement from the companies that we invest in in the future, and we look forward to sharing updates with you soon.

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

Women occupy just 21.6% of MSCI World Index company board seats

Female participation in the global workforce is unequal, and a key area of inequality is in senior corporate positions. Women occupy just 21.6% 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 2019.

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 emphasise 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.

See, for example: https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters
2 https://www.msci.com/documents/10199/36ef83ab-ed68-c1c1-58fe-86a3eab673b8
3 https://www.mckinsey.com/featured-insights/employment-and-growth/how-advancing-womens-equality-can-add-12-trillion-to-global-growth

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

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Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell this country or sector. Please note that holdings and positioning are subject to change without notice.

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