Taking a tougher line on female board representation

However, pressing for increased female representation in the workplace is not just the right thing to do, it makes financial sense.

Research from McKinsey indicates companies with the most gender diverse executive teams are 25% more likely to have above-average profitability than groups with the least gender diverse leadership.

The impact of engagement

At the board level, greater diversity has also been shown to enhance shareholder returns through better decision making, as a diverse board is more likely to consider potential challenges from a range of perspectives and avoid herd-like thinking.

We therefore oppose the election of all nomination committee members of all-male boards anywhere in the world.

Additionally, we press for a minimum of 30% female representation in the US, Canada, Australia and Europe; and 33% in the UK. If this expectation is not met we vote against the Chair of the nomination committee.

We have voted against the election of 56 directors based on insufficient female board representation, so far in 2021.

This compares to votes against 50 directors over the same period in 2020. In recent years, we have been seeing a sharp decrease in the number of our ‘against’ votes as companies react to investor pressure, and demonstrate tangible progress on diversity.

However, this year’s increase most likely reflects our tougher stance, having raised the bar from our previous minimum expectation of 25% female board representation.

Looking ahead to 2022, we anticipate rolling out the 30% guideline across all regions, and incorporating an assessment of ethnic diversity. In this way, we expect to extend our impacts further on a regional basis, and with respect to diversity beyond gender.

In cases where a board falls short, but on engagement has committed to reaching the target, or otherwise evidences meaningful progress and intent, we may support the chair of the nomination committee for one year on the proviso that progress is made.

We continue to keep a close eye on whether a company has taken meaningful steps to improve diversity among senior executives, and pay particular attention to the quality of roles assigned to female directors, as well as the diversity and inclusion initiatives applicable to the wider workforce.

Another mechanism for investors to drive change is via supporting shareholder resolutions.

In the US and Canada, we have noticed an ongoing increase in shareholder resolutions explicitly calling for gender and racial pay gap disclosures, as well as for employment diversity reports.

So far this year, we have supported diversity-related shareholder resolutions filed at Bank of Nova Scotia, Amazon, JP Morgan and Charter Communications.

This highlights investor expectations for greater transparency are allowing scrutiny of companies’ diversity programmes.

We welcome the expansion in focus and encourage others in the industry to continue to support these types of resolutions.

Diversity disparities

As global investors, we also take into account that diversity issues will vary by region.

The areas seeing the fastest improvements in gender diversity at a board level tend to be in regions with laws and mandatory quotas in place – such as in a number of Western European countries.

These are typically set at or above the 30% level, as research shows this is the minimum threshold for minority groups to impact boardroom dynamics. In our portfolios, the companies with the highest female representation come from the regions with quotas.

In particular, the UK’s progress over the past five years has been encouraging.

The number of female directors at FTSE 100 firms has increased by almost 50%, and women now comprise more than a third of the directors of FTSE 350 companies.

This is largely due to the introduction of targets via the 2015 Hampton-Alexander Review, as well as the efforts of investors and civil society organisations, such as the 30% Club.

However, while a few UK boards have achieved gender parity, this is not yet the norm and we are also still seeing a handful of companies on our buy list that have only one female director.

In the US, we see good examples of board diversity in large companies such as Facebook, Merck, Microsoft and Estee Lauder, which are all above 40% female representation.

But if we apply a 30% board diversity threshold, approximately 62% meet this minimum.

If we increase the threshold to the UK’s 33% minimum, the figure drops to 44%.

Further afield, we see the least improvement in companies based in Japan, China and Korea – where it is still common to see all male boards, or boards with a single female director.

In terms of our current engagement, we have made particular efforts to prioritise our Japanese holdings to press for change.

We are pleased that our portfolio companies are willing to discuss key diversity topics, and we are seeing promising signs that change is happening, though perhaps not yet at the pace we would like.

Therese Kieve is a stewardship analyst at Sarasin & Partners

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