Diversity has long been an ESG factor we have regarded as important. It seems logical to us that a group of people from different backgrounds, ethnicities, genders and even age groups are likely to bring a diverse set of perspectives which enable them to avoid that dangerous ‘group think’ that can be so damaging to effective decision making. Today, there’s a wealth of research out there that supports this logic too, showing the correlation between strong diversity on leadership teams and better company performance.
However, despite the emergence of credible research in this area and the efforts of groups such as the 30% Club, we have seen companies and board rooms be too slow to evolve. Over a fifth of the 2,694 MSCI ACWI Index companies still have all-male boards, and nearly all have majority male boards (just 43 have either majority female or 50/50 boards).
Therefore, we wanted to start taking more action on this point. So in May 2018 we implemented a diversity voting and engagement policy, whereby if a company was located in a country in which we thought 30% women on the board was a reasonable expectation, and the company lacked a formal statement on board diversity, we would vote against the chair of the nomination committee of the board. While of course we recognize gender is certainly not the only measure of diversity, it remains the most publicly reported, clear-cut data point that investors are able to access, and so the only one we can vote on. This year we have expanded the policy to focus on the broad diversity and inclusion practices throughout a company’s business, a hugely important factor as I explain below.
What Were the Results of Our Policy?
Between May 2018 and July 2019, we voted against directors at 21 AGMs owing to insufficient board gender diversity and insufficient policies and programs on broader diversity. This includes nine in 2018 and 12 so far this year.
In the context of the c. 400 equity holdings that Newton has, this may not sound like a huge amount of voting activity, but one of the main goals of the policy was to initiate constructive engagement conversations with companies, and to signal that we are taking diversity very seriously.
This is definitely working, and we are seeing numerous companies responding to our approaches informing them of our policy and potential voting action, and requesting either more information or a meeting – including companies for which diversity is not a familiar subject.
Our policy is also moving diversity up the engagement agenda with companies too. For example, diversity topics were a significant feature of over 30 meetings from May 2018 when we initiated the policy, compared to just 15 meetings in 2016 and 2017 combined. Our ability to vote against directors on diversity grounds certainly adds weight to these discussions.
So, What Have We Learned?
1. Two-way communication is vital: If our policy is to be successful in ensuring the companies in our clients’ portfolios harness the full benefits of diversity, two-way communication with companies is essential. We do not want to simply vote against a director on diversity grounds and walk away, as this will not achieve our objectives. Engagement has enabled us to be clear that we do not want to encourage tokenism or quotas, and we have impressed upon companies that ‘hiring in’ diversity is pointless unless the right environment is established. It has also given us a better understanding of some of the unique challenges companies face.
This constructive approach has, we believe, enabled companies to be more open to engagement, and enabled us to have conversations we have never had before. For example, we recently held a very beneficial discussion with the non-executive director of a Chinese internet company – a sector and region which have not previously been open to discussing such topics with investors.
2. Levels of disclosure are poor, regardless of company size: Since we incorporated analysis of a company’s diversity disclosure for its entire workforce, we have realized just how bad public disclosure on diversity is. Even large, well-established companies provide little information in this area, either to investors or to prospective employees on their careers pages.
Over the last year, we have had countless discussions with management teams and boards about their well-developed and thoughtful policies – but none of these are made public! With younger generations and those from minority groups in particular attaching greater importance to diversity and inclusion when choosing a workplace, we have been telling companies that they will miss out on attracting the best, diverse talent unless they improve their disclosures. This is such an easy win for some companies; after all, disclosure is free.
3. All companies, regardless of industry, have less gender diversity at the top: We have found that many companies today (even some in traditionally ‘male’ sectors) have a fairly equal gender split at graduate level. However, as we look upwards through the ranks, the proportion of women dwindles. The primary cause of this is obvious: women have historically always acted as the primary care-giver in families. However, attitudes are changing, and there is a strong case that there is also a level of unconscious bias which puts off women from applying, and prevents other senior people from hiring them.
As such, we always seek to find out how a company ensures its hiring and promotion process avoids these biases, and how it is growing the pipeline of women to go into leadership roles. Another really important factor in this area is the company’s parental (not just maternity!) leave policies, and its use of flexible working to help parents and caregivers at all stages of their career.
4. Companies are concerned about the lack of female board candidates: It is certainly a greater challenge for some industries than others; however, here we would suggest that an effective board requires a wide range of skills that can be recruited from a number of disciplines where perhaps there are more readily available female candidates.
Yes, under the current selection criteria, there may not be enough candidates, but this isn’t the only way. Seeking to establish a more diverse board will initially seem uncomfortable, both for companies and to us as investors, as, to hire more diverse candidates, nomination committees may have to change their process or think outside the box. However, we do not believe this will result in less-qualified candidates, but individuals who are differently qualified, which, after all, is the entire reasoning behind the policy – to encourage diversity of thought.
We believe we have set good foundations for our work in this area, and we have certainly learned a lot about how to approach the topic effectively with companies and initiate change. Nevertheless, this is just the start, and there remains much for us to do. Over the next year, we will be thinking about:
Engaging on other elements of diversity: Currently, the voting element of our policy only incorporates gender, but we are actively seeking ways to expand this, and we note that in the US two bills have been passed by the House Committee on Financial Services which will introduce board disclosure requirements on a wide range of diversity metrics.
In the UK, we are also aware that diversity discussions tend to be skewed towards gender, around which campaigns have been centered most recently. To ensure that the team better understands all the different issues unique to different types of diversity, we are harnessing BNY Mellon and Newton’s internal HR expertise and employee resource groups. So far, this has been hugely beneficial, and we look forward to sharing some of the discussions on this.
Disclosure: As part of encouraging companies to improve disclosure, for the second year in a row we are supporting the Workforce Disclosure Initiative, a program led by Share Action, which is requesting comparable data from companies via an annual survey. As well as making use of this data, much of which is gender-related, we will be engaging with companies to encourage them to provide data to the program, as we did in 2018.
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