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.
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:
- Encouraging companies to increase the participation of women at senior levels by growing the pipeline
- 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:
- 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).
- 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
- 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.
- 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.
1 See, for example: https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters
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.
This is a financial promotion. This document is for institutional investors only. `Newton’ and/or the `Newton Investment Management’ brand refers to the following group of affiliated companies: Newton Investment Management Limited and Newton Investment Management (North America) Limited (NIMNA Ltd). In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Melllon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including NIMNA Ltd.
Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved.
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.