Many prominent shareholders, such as institutional investors and PE firms, are putting pressure on the companies they own to report on the diversity characteristics of their board members and to increase the number of women and other groups on their boards. And while many companies are responding to this pressure and creating roadmaps to improve their board diversity, significant barriers remain.
To find out how companies are currently approaching the issue of board diversity, Toppan Merrill commissioned Mergermarket to speak with three leading experts as well as one public company executive.
Toppan Merrill question: In your experience, how important is board diversity to investors when evaluating a company’s ESG credentials in the current environment? Which types of diversity do you think investors are most concerned about? Leading industry experts weigh in...
Lori Zyskowski, Gibson Dunn says: Diversity is definitely very important to institutional investors. If you look at large investors such as BlackRock and State Street, or large pension funds such as CalPERS and CalSTRS, they have all been very vocal on enhancing diversity on company boards.
I also think what started out being a significant focus on gender diversity seems to be moving into other areas of diversity, such as race and ethnicity. Diversity of tenure on boards is also something that institutional investors are focused on – State Street demonstrated that a few years ago when they looked at the average tenure of board directors.
John Valley, Osler adds: Diversity has become increasingly important over the last few years. In 2017, the momentum built with the Fearless Girl statue being installed on Wall Street, and a change in tone from institutional shareholders and proxy advisors, including starting to talk changes in voting guidelines with respect to gender diversity. I think this has been a long time coming.
I would agree with Lori that the primary focus has been on gender diversity, particularly in the post-#metoo world. But I think you're starting to see some focus on other diversity characteristics as well. In the UK, the Parker Review committee issued a report in late 2017 that dealt with ethnic diversity at UK firms. The Lloyds Banking Group and Royal Bank of Scotland have made some public declarations about ethnic diversity targets for their senior management teams.
We’re seeing it here in Canada as well, though it's not necessarily as widely reported. One example of movement in that direction here is our federal government passing legislation that would require public companies incorporated under our federal corporate statute to make disclosures relating to gender diversity and diversity characteristics beyond gender. The changes haven’t been proclaimed into force and the regulations haven’t been finalized, but change in this regard is coming.
Naz Zilkha, Dechert weighs in: I advise a number of clients with public boards, and diversity issues have been a topic of concern. I also advise a number of private equity firms that have invested in public companies, and they are also interested in understanding how the rules are changing in this area and with which requirements their boards may need to comply. So it is definitely a hot topic.
In February, the SEC came out with their guidance on proxy disclosure, and it provided guidance on when companies should disclose information regarding board diversity in their proxy. When that came out, I think it prompted a number of questions about whether additional information on diversity is required to be included in their proxy filings.
I would also agree with Lori and John that by and large, the strongest emphasis is on gender diversity on boards. That has been more discussed than other aspects of diversity. I think part of what makes the diversity discussion complicated is that there isn't a comprehensive definition of what diversity means.
Many folks tend to think about it in terms of gender, but there are obviously all sorts of other aspects of diversity that could be considered, such as age, ethnicity, sexual orientation, religion and nationality. The SEC hasn't said what it thinks diversity really is or which types of diversity should be considered by boards – instead, the Commission has left it up to companies to decide what policies they want to adopt and which distinguishing criteria they view as important in their candidate nomination process.
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