Board diversity issue taking hold with proxy advisors

Pru Bennett
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(Pictured: Pru Bennett)

by Greg Bright

The influential proxy voting and governance consulting firms are becoming increasingly involved in the push for greater board diversity at public companies, with one of them saying it will vote against the chair, if necessary, to sway boards to introduce women directors.

The trend in Australia for greater diversity, as in most advanced countries, is gathering pace but there is still a long way to go, according to BlackRock’s Hong Kong-based Pru Bennett, the firm’s corporate governance and responsible investment director for Asia Pacific.

Bennett, an Australian who spent 12 years at one of the three proxy voting consultancies – CGI Glass Lewis – before joining BlackRock in 2010, recently produced some research which shows that at least most ASX-200 companies now have gender diversity policies. Of the 18 per cent with no gender diversity on their boards (that is, no women) – 38 per cent are from the resources industry.

She said that her old firm, CGI Glass Lewis, has said it would consider recommending voting against the chair of the nomination committee, or the equivalent, at the company’s AGM if a company’s record on diversity was poor. She noted that the Australian Council of Superannuation Investors also referred to diversity in the discussion of core principles of board composition in its guidelines.

There are three main commercial proxy voting consultancies in Australia (ACSI is a not-for-profit representing more than 20 big super funds). They are: CGI Glass Lewis, ISS Governance and Ownership Matters, which is the most recently established firm set up by former key staff of ISS. While each of the three considers all aspects of board composition, including diversity in its various forms, only CGI Glass Lewis has a formal diversity checklist in its guidelines.

Martin Lawrence, the research director at Ownership Matters, said that the real driver behind the board diversity discussion was the issue of board quality, especially since the global financial crisis.

He said that most of the big companies had moved to appoint more women directors but boards were still predominantly made up of “old white men”. “We look at the quality of the directors and their experience and so on and then ask: ‘by the way, would it kill you to look at the other half of the population?’.”
He said that while his firm was observing the diversity issue in discussions, he did not believe it was yet driving voting behaviour. And diversity was about more than gender. The issue of ethnicity was also important, especially for a country like Australia where many companies drew a significant portion of their revenue from Asia.

“There aren’t many ASX-listed companies which have a director of Asian ethnic origin, unless they have a big Asian shareholder,” Lawrence said.

It makes sense that if half of a company’s revenue is coming from China, say, then it would be good if the board had a better sense of how these consumers thought and behaved and what cultural or other local issues may be at play in the company’s future revenue possibilities.

Lawrence said this was a complex issue, though. It was often difficult to tell a person’s ethnic background, especially after a generation or two. And different countries will have different expectations of their directors and directors different expectations of the companies. In Korea, Lawrence said, directors tend to be paid about A$20,000 a year – much less than in Australia – and perhaps put in effort which was commensurate with that level of pay.

Bennett said that the evidence from around the world was now overwhelming that companies which had boards with gender diversity outperformed those which did not. There was also increasing evidence that boards with diversity in other ways – such as skill-sets, occupational backgrounds and ethnic backgrounds – also outperformed, but these tended to be more difficult to measure.

International comparisons are also difficult because of varying reporting standards and guidelines. For instance, in the US, the gender diversity reporting policies of listed companies lump together both directors and senior executives. Latest figures show that this broad category constitutes 17 per cent women in the US.

If more women on boards mean better performance for a company, why is this the case? Is it that the company has searched in a bigger pool for its talent or is that women tend to act differently to men as directors?

“The feedback that I get from chairmen is that women do bring a different point of view,” Bennett says. “They are usually very thorough and they tend to focus more on risk.”

Other researchers have pointed out that women tend to be more inclusive of all stakeholders in a company. For instance, it is suggested that women are more likely to be concerned about the welfare of all staff, not just senior management, and other stakeholders such as suppliers and the broader community. Interestingly, it has also been suggested that women are less likely to award themselves higher remuneration packages. If those things are true, it is likely that a company’s good performance will be more sustainable over the long term.

Another interesting theory based on observation is that the number of women on a board is relevant to any impact they may have. While this may sound obvious, a board which has one woman director may not act any differently from a board with none because of the woman’s behaviour. To put it crudely, she may feel like she needs to be just as blokey as the blokes. It’s suggested, too, that a board with two women will not gain much benefit because the men who dominate the numbers will see them as a bloc and react accordingly. So, for an eight-person board, for instance, the optimum minimum number of women may be three.

Women in the ranks of senior executives is a bigger and more complex issue. It is arguably more important, as well, because senior executives become future directors. Bennett believes that the “gene pools” for directors – the executive ranks of women – need to be expanded. If you do that, the excuse that there were insufficient experienced women to fill the board seats would go away.

“When we meet with a chairman we look at all the diversity aspects and we look at the industry in which they operate,” Bennett says. “We tend to focus on the independents because they are our representatives… We ask about their processes for board renewal and we want to see a wide search taking place.”

The issue of board renewal and composition has been raised for super funds in the context of their own boards. Although the former assistant treasurer, Senator Sinodinas, has been suspended from his role, he had been championing the notion of super boards having a three-plus-three-plus-three board composition of independents, employer reps and employee reps. This may well be mandated in the future but there is not yet a bill before parliament.

With corporations, where directors face shareholders annually and are up for renewal at least every three years, the consensus seems to be that about 10 years should be the maximum time spent on a board by a non-executive director. Many super funds would fail that test.

Lawrence says, though, that both super funds and the finance sector in general seem better served with gender diversity than other types of organisations and industry sectors.

I once asked Mavis Robertson, founder of CMSF and former industry fund chief executive, why women were so well represented in both the top executive ranks of funds and at trustee level, at least compared with other sectors. She replied, with words to the effect that this was an historical accident. She said that the men who controlled the trade unions did not think that the new super funds would become as important as they did, so they were happy to see them run by women. I’ve never been sure how serious she was being with her response.

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