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Difference through diversity

01 November 2018 by Clare Payn

Difference through diversity

There has been progress for the representation of women on boards, but there is still a long way to go

As a testament to continued commitment and focus, there was some recent good news – the companies in the FTSE 100 have reached over 30% representation of women on boards of directors. The boardroom is where a company’s strategy and oversight are discussed and challenged, existing not just to protect the business, but also to protect all of its shareholders, including many of our clients.

One of the biggest criticisms of the banking industry to come out of the Walker Review following the financial crisis was that non-executive directors sitting on corporate boards were largely all male and had similar backgrounds. In other words, there was a high degree of ‘group think’ which resulted in little challenge of company management and presented a major corporate governance risk for investors.

Counteracting this risk means pushing companies to appoint a more diverse board of directors – an approach that we believe can bring economic, as well as cultural benefits to a company. A growing body of empirical research supports the business case of gender-balanced organisations illustrating enhanced corporate performance, a more innovative working culture and being better connected to customers. PwC estimates that economic gender parity could add an estimated US $180 billion to the GDP of the UK.

These figures combined with a number of other indicators present a clear case for supporting diversity. Having evolved and strengthened our policy over the years, we vote against board chairs of FTSE 350 companies if they have not already reached 25% women at board level, and our voting policy is impactful. In 2017 we voted against more board chairs than ever at UK companies due to poor diversity and the number has doubled already in the first half of 2018.

We have seen significant progress in the UK for the representation of women on boards and now only eight companies have all male boards, but the picture at the executive level is not so rosy. The number of women in executive positions has recently stagnated, falling from 7.7% to 6.4%. Yet, we need progress at this level, as it is the executive team that sets strategy and from which the CEO position is often selected.

“We have seen significant progress in the UK for the representation of women on boards, but the picture at the executive level is not so rosy”

Therefore, we’re pushing companies to develop strategies that will lead to more women being promoted across all levels of the business.

As part of our membership of the 30% Club Investor Group in the UK, we have committed to engage collaboratively with UK companies where board level diversity is poor and policies need to be improved. This collaboration strengthens our voice, and helps companies to understand the importance of this issue to their investors, illustrated by the fact that the Group now has 32 members with combined assets under management of £11 trillion. We sit as co-chair of the group in order to formulate objectives. The Group recently engaged with the board chairs of some target companies in the real estate sector and progress has already been made with some of these companies appointing additional women to their board.

Our voting reflects not just board composition, but also the quality of diversity policies. We understand this is not an easy issue, but some companies still present generic ‘boilerplate’ policies that do not give any insight into how they really view diversity or what they are doing to address the issue at board, executive committee and employee level. Companies need to be turning diversity policies into diversity strategies. We consider a company’s workforce as important as its financial assets and expect that better policies and disclosures regarding its human capital should be developed.

We co-founded a coalition to engage on the issue of board diversity and refreshment at US companies along with US pension funds CalSTRS, OPERS and Dutch asset manager APG. We wrote to 60 US companies where board diversity and refreshment are poor, offering to meet them in order to better understand their processes and broader commitment to these issues. Since then, 37 of the companies have appointed additional women to their board or improved their policy.

Our view is those organisations that genuinely embrace cognitive diversity, as manifested through appropriate gender representation and a broad spectrum of skills and experience, are more likely to achieve better outcomes for investors.

We believe that closing the gender gap will have real-world economic benefits and we’re determined to help make that difference.

Clare Payn is Head of corporate governance, North America at Legal & General Investment Management

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