Published 4 March 2012
By Ruth Sullivan
Regulators, politicians and shareholders are stepping up pressure on companies for greater board diversity as part of a drive to boost good governance and efficiency, forcing boards to rethink their composition.
Among shareholders calling for change in the companies in which it invests is Legal & General Investment Management, one of the UK’s largest investors.
“LGIM is challenging the composition of boards and bringing diversity into the broader discussion on board nominations and succession planning. We intend to increase that pressure in the future,” says Sacha Sedan, head of corporate governance.
“We want dynamic people and care about skills, nationalities and gender,” he adds.
On the other side of the Atlantic, pressure from Calpers, the California Public Employees’ Retirement System, the largest US public pension fund, recently forced Apple to give shareholders more influence over the election of directors, a move that other companies may have to follow.
In Japan last year, bringing in Michael Woodford, a Briton, to head Olympus, the camera maker, triggered more than just a departure from the culture of an all-Japanese executive, uncovering one of the country’s biggest accounting scandals and shaking up the company.
Olympus still has a long way to go on reforms. Foreign shareholders such as F&C are voicing unhappiness over a new 11-member board, which it says consists of the company’s bankers, major investors and related parties. Shareholders will vote on the board at an emergency general meeting next month.
There is increasing agreement among stakeholders that diversity at board and top executive level in terms of nationality, skills and gender leads to more transparency and improved governance practice, however painful the path.
In the US, advisory council members of the National Association of Corporate Directors maintain “lack of apparent diversity can be a sign that the board is not engaging in a rigorous search for the most qualified people, since qualified directors are not concentrated in only one race or gender but can be found in every demographic group”.
The council also suggests that a low level of demographic diversity could be the result of a high proportion of board members being chief executives rather than senior managers or professionals, as the former tend to reflect a less diverse population.
A 2011 joint report by the New-York based Conference Board, NYSE Euronext and Nasdaq on diversity shows little change over the past few years on diversity of directors’ professional backgrounds, with half of the board members of public companies coming from other for-profit companies. In the financial sector this rises to nearly three quarters.
Little progress has been made on increasing the number of female chief executives in large quoted companies with only 16 women CEOs in the entire S&P 500, according to S&P data for 2010.
Matteo Tonello, head of corporate leadership at the Conference Board, says the board of directors of US public companies over the past decade “has continued to draw its talent from the same old pool of individuals with top-level experience as business strategists – individuals who often know little about the new set of oversight responsibilities and, by the open admission of many of them, loathe having to deal with what they perceive as a distraction from business leadership matters”.
Some stakeholders believe best practice in diversity brings more benefit to a company than improving governance in that more diversified boards lead to better performance.
“Getting the best people on boards is important to getting the best returns,” according to L&G’s Mr Sedan.
Helena Morrissey, chief executive of Newton Investment Management and founder of the 30 per cent Club that aims to bring more women on to UK boards, takes it further. “Board diversity is aimed at improving business decisions, reducing risk, sustaining profits growth and therefore higher long-term returns for shareholders,” she maintains.
Research on the extent to which board diversity contributes to performance is growing but findings differ and it it is hard to determine cause and effect.
In terms of gender diversity, a recent Thomson Reuters report, Women in the Workplace, indicates share prices at companies that open job opportunities to women may fare better in volatile or falling markets.
In contrast, a study published in the North Carolina Law Review by Frank Dobbin, a Harvard sociologist, Corporate Board Gender Diversity and Stock Performance 2011, says studies suggest that over the long term board gender diversity does not help companies and may hurt them.
However, it concludes this is due to institutional investor bias against female appointments, as it finds that “female directors have negative effects on stock value and no effects on profits”.
It adds that this is no surprise, given that other favoured corporate governance practices, such as splitting the chairman and chief executive role, do not lead to “increases in profits, stock value, or institutional holdings”.
Regardless of differing opinions, regulation and guidance on diversity is clear. The US financial regulator introduced rules in 2009 requiring public companies to define and disclose their diversity policy, while in the UK the Financial Reporting Council and the revised UK Corporate Governance Code followed suit last year.
So what else is needed? Seamus Gillen, policy director at the Institute for Chartered Secretaries and Administrators, says an awareness of the issue at board level is not enough. “Boards need to have a real understanding of what diversity in a company means, the challenges it brings, and act on it,” he says.
To do this boards have to work out where the gaps in skills and mindsets are within their own companies, and recruit from a wider range of people, including academics, entrepreneurs and people from other social class backgrounds, as well as women, he adds.