As responsible investors, we want to make sure that the companies we invest in are genuinely moving the dial in the right direction, and taking steps to remedy issues when they find them. In 2021, we intensified our efforts to drive change.
Why diversity and inclusion matters
Research points to the value of a diverse board, suggesting that embracing diversity at a board level helps guard against groupthink, facilitating input and challenge from a range of perspectives. A proactive approach to diversity also builds in the advantages of a wider talent pool for candidate selection. A diverse board is also likely to be able to better understand the needs of a diverse customer base, ensuring that a company’s management is aligned with end consumers. It is our belief that companies with diverse boards make better investments and are better placed to navigate a rapidly changing world.
A diverse and inclusive workforce is increasingly a priority for companies – and for their employees
If the carrot is not enough, the stick may provide an impetus for change. NASDAQ board diversity rules now require most companies trading on the exchange to have (or explain why they do not have) at least one female director and at least one director that is either a member of an ethnic minority or the LGBTQ+ community. In the UK, as at April 2022, the FCA has set targets requiring at least 40% of board members to be female, with at least one senior board position to be occupied by a woman. At least one member of the board should come from a minority ethnic background.
Assessing the challenges
Making progress on diversity targets can be challenging, not least because there is a high level of variability between regions. Countries with mandatory gender quotas, which are increasingly common in Europe, are making fast progress. Voluntary targets, such as the UK’s best practice board-level quota of 33%, are also effective in driving change. In 2022, women held 38% of board seats in the UK, with Western Europe coming in at 35.5% and the US trailing slightly at 30.4%. In Asia, the picture is quite different. In South Korea, only 10% of board seats were held by women in 2022, and in China only 11.9% seats were held by women.
Diversity also varies by industry. Companies within the healthcare, consumer staples and utilities sectors score highest on board diversity, while those in energy, materials, IT, industrials and financials lag significantly. What this means for us as an active investors is that a standardised approach to engagement is unlikely to be effective.
An action plan for change
While we want to see companies make broad improvements in gender and ethnic diversity, we focused our efforts on one of the most well-established metrics – gender diversity at board level. We also sought to make substantive progress on ethnic diversity.
In 2021, we identified three mechanisms through which we could effect change.
- Tailored engagement for laggards
A number of companies on our buy list had a lack of diversity at board level. Having written letters to these companies to express our concern, we developed tailored engagement plans for any companies that had not responded to us, employing tools such as letters to the chair, post proxy votes and letters, and calls.
- A tougher voting policy for gender diversity and a new ethnic diversity voting policy
Voting is one of the core levers shareholders have to drive change, so we regularly review our voting policies to ensure they evolve along with our thinking.
- Carry out policy outreach on ethnic diversity through support of the 30% Club
We are a signatory to the 30% Club UK Investor Group and publicly support both its engagements and its targets:
- At least one person of colour on FTSE 350 boards and executive committees by the end of 2023
- Half of the target 30% of board seats allocated to women to go to women of colour.
How well did it work?
Our tailored engagements were successful; in 2021, we wrote to 24 key companies, achieving a response rate of around 80%. Seven companies now meet our guidelines and three more have made meaningful progress.
Our engagement with Mastercard had a positive impact. We met with the LID and Chief Inclusion Officer in 2021 to discuss our expectations. We were reassured that diversity was a top priority and were pleased to see the board complete a refresh in 2022, with an emphasis on diversity and independence. The board now meets our expectations but we will continue to engage with Mastercard on pay equity.
In 2022, we made some key changes to our voting policies. We now expect that all companies globally have at least 30% gender diversity at board level (33% for the UK). This builds on our 2021 requirement, which increased our demand for global developed markets ex-Japan boards from 25% to 30%. With respect to ethnic diversity, we expect UK and US companies to have at least one director from an ethnic minority background.
In 2021, we voted against 64 directors for insufficient board diversity, and have voted against 124 directors so far in 2022 for the same reason.
As a signatory to the 30% Club UK Investor Group, we participated in a number of bilateral engagements and policy outreach efforts, spearheaded an investor statement on the 30% Club’s expectations for ethnic diversity data and transparency, and took part in a number of collaborative engagements. Following these engagements, both DS Smith and 3i have confirmed new director appointments. We also voted against 44 directors in 2022 for insufficient ethnic diversity.
We have seen solid progress on the diversity of our buy list. As of October 2022, 74% of companies on our global buy list are now achieving 30% gender diversity at board level, up by 21% from 2021. We believe this reflects a number of factors – increased regulatory focus, wider investor pressure, as well as our efforts on engagement.
Are we practising what we preach?
As strong believers in the power of diversity and inclusion, naturally we want to see these values reflected within our own company.
Our own work on diversity and inclusion has taken positive steps forward in the last year. We continue to report on our gender pay gap and are making incremental progress. We are conscious that the financial and insurance sector has the worst mean pay gap of any sector in the UK and are firmly committed to closing this. Our experience with the companies on our buy list helps inform how we approach diversity at our own organisation, and we will continue to promote diversity and inclusion – not just at the companies we hold on our clients’ behalf – but within our own workforce.
Looking ahead, we will continue to push forward on diversity, through further tailored engagements for laggards, our ethnic diversity voting policy, a focus on gender diversity within executives and senior management (as opposed to board), pay equity and through our leadership of the 30% Club UK Investor Race Equity Working Group.
Following successful engagement with FTSE 100 companies on ethnic minority representation in March 2022, the 30% Club UK Investor Race Equity Working Group has extended this engagement to companies within the FTSE 250 and seeking progress by the end of 2023 – ahead of the Parker Review’s target of 2024. Reaching out to smaller companies is a key step in achieving ethnic diversity – smaller companies may not traditionally have been subject to as much investor scrutiny and smaller boards have specific challenges that the 30% Club can support on.
Ultimately, ethnic representation at board level is just the first step. Progress within the workforce is a key focus for us, and we will look to see evidence of this through explicit company strategies and public reporting.
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