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The investor view on diversity and inclusion this AGM season

The 2021 AGM season will be a chance for investors to back up their recent pledges on racial equality, and continue to push on gender

Gender diversity has been an increasingly common topic at AGMs in recent years, spurred on by the 2017 Me Too Movement, which focused the world’s attention on the continued sexual harassment and abuse of women in workplaces and beyond. But last year’s Black Lives Matter Movement has brought the lack of progress on racial and ethnic diversity into sharper focus too, and that will make its way into shareholder voting decisions this proxy season, with many investors considering the issue for the first time. 

“The events in the US were a much needed catalyst for everyone to take stock of whether we were making enough progress on this issue,” says Amy Wilson, UK Engagement Lead at EOS, the stewardship advisory arm of investment house Federated Hermes. “It was an important moment for a lot of organisations – including ourselves – to stop and see if we can do more”. 

A 2020 report from Stanford Graduate School of Business, suggests more must be done: it showed that, across Fortune100 companies, just 3% of CEOs, 1% of CFOs, and 3% of division leaders were Black. 

Investors have been loud about their commitment to tackle this underrepresentation across North America and Europe – especially through their voting. Vanguard recently told RI that ensuring companies are progressing on inclusion and diversity is “going to be a key theme for this AGM season”, and BlackRock has said it will ask firms to demonstrate “board and workforce diversity consistent with local market best practice”. From next year, Legal & General Investment Management will vote against all-white FTSE100 boards. 

“We put out guidance on racial equity in August 2020, so by 2022 companies will have had nearly two years to understand the issue and to take action to improve the racial makeup of their boards” – Rob Walker, State Street Global Advisors

This year, State Street Global Advisors (SSGA) has pledged to vote against the Chairs of nominating and governance committees at S&P500 or FTSE100 companies that don’t disclose their boards’ racial and ethnic diversity. In 2022, they will do the same for companies without at least one director from an underrepresented community.

“We put out guidance on racial equity in August 2020, so by 2022 companies will have had nearly two years to understand the issue and to take action to improve the racial makeup of their boards,” says Rob Walker, Managing Director and Global Co-Head of Asset Stewardship at SSGA.

For Walker, investors using their vote “sends a public signal that companies need to take action”, but he stresses the importance of longer-term engagement too, noting that there has been a shift in the conversation between investors and companies on diversity. 

“When we used to say ‘women represent 50% of the population’, companies weren't that responsive. But when you say, ‘there’s mounting evidence that board diversity can have a positive impact on corporate performance and economic growth’, it's harder for them to say, ‘no we don't want that’”.

A 2019 study by S&P Global concluded that firms with female CEOs and CFOs produced better stock price performance than the market average. In the 24 months post-appointment, female CEOs saw a 20% increase in stock price momentum and female CFOs saw a 6% increase in profitability and 8% larger stock returns, it said. A 2018 McKinsey study found that “companies in the top-quartile for ethnic/cultural diversity on executive teams were 33% more likely to have industry-leading profitability”.

Royal London Asset Management (RLAM) has been engaging with UK companies on racial and ethnic diversity over the past year, but not the laggards: the firm is focusing on leaders, says Ashley Hamilton Claxton, RLAM’s Head of Responsible Investment, and holding them up as best practice for peers to learn from.

She explains that RLAM doesn’t plan to vote against companies over racial and ethnic diversity issues in 2021, but will monitor progress and escalate at future AGMs if companies don’t learn from market leaders. In 2022, it may abstain from votes at companies that are still failing to respond to engagement, in a bid to “signal an issue of concern and open up a discussion”.

Calvert Research and Investment – the US responsible investment house acquired by Eaton Vance in 2017 – was particularly outspoken on the issue of diversity and equality last year. This AGM season, it will be voting against the nominating committees of US, Australian and Canadian firms with fewer than “two people of color” or those that “are less than 40% diverse”. Globally, it will vote against those with fewer than two women on their board. 

EOS is recommending a vote against the Chairs of FTSE100 boards without at least one director from an ethnic minority background or a credible plan to rapidly achieve this, and says this expectation is being made clear during its dialogue with companies. 

But it’s not just boards that will be under scrutiny this year. On gender, EOS is recommending a vote against the chair of any FTSE100 company with materially less than 20% female representation across the executive committee and its direct reports. In future, it may expand beyond the FTSE100 and raise these thresholds. 

“It’s important,” says Wilson. “Otherwise you may end up with what is termed ‘snowy peak’ syndrome – you will get good diversity at the very top, such as the visible layer of the board, but less below that.”

Other investors are focusing on the role of companies in exacerbating racial inequalities in society, rather than their in-house performance. Arjuna Capital, for example, has filed at insurance firm Chubb, asking it to “help ensure its insurance offerings reduce and do not increase (by insuring municipalities facing related civilian litigation) the potential for racist police brutality.” 

“The whole point of diversity is you can't put it in a box. You have to think about it holistically. It's a bit of a false promise to say ‘we're going to look at gender this year, then we're going to look at ethnicity, then we'll do LGBTQ.’ It's not how the world works” – Ashley Hamilton Claxton, Royal London Asset Management

The banking industry is also being asked to answer questions about its role in structural racial inequality. CTW and US labour union SEIU have resolutions lodged at eight US giants, including JP Morgan Chase, Wells Fargo and Citigroup, asking them to conduct racial equity audits to analyse how their business activities might have “adverse impacts on non-white stakeholders and communities of colour”.

While gender, race and ethnicity are now firmly on responsible investors’ voting agendas, other underrepresented communities such as LGBT+ and people with disabilities, are not receiving the same attention. 

But Ted Kennedy, Chairman of the Board of Directors of the American Association of People with Disabilities (AAPD), says things are beginning to change. Public players in the US – including Massachusetts Pension Reserves Investment Management and New York Common Retirement Fund – have signed an Investor Statement on Disability Inclusion, promising “to encourage our portfolio companies to capitalise on the opportunities of disability inclusion”.  

 On the corporate side, Kennedy points to what he describes as “a mistake” by marketplace Nasdaq, which plans to require its companies to have at least two “diverse” directors. Those plans have been widely praised, but they only relate to gender, race and ethnicity. AAPD and fellow campaign group Disability:IN are leading an initiative to get Nasdaq to incorporate disability into the assessment.

One barrier could be data, points out Hamilton Claxton. “Data gathering is a legitimate challenge for companies, because of GDPR,” she explains, referring to the EU’s 2018 General Data Protection Regulation – a strict set of privacy and security rules about the use of personal information. Topics such as gender, race and ethnicity are already built into most standard disclosures, but others such as disability and sexuality often aren’t. “And it's very sensitive, people might not want to disclose it," she says. 

Matt Cameron, Global Managing Director of LGBT Great, says “you can’t measure LGBT+ diversity and inclusion in the same way as you measure gender or race and ethnic diversity”. 

“LGBT+ diversity needs a framework which analyses inclusion indicators overall,” he says. This could include information on how an organisation advocates on key issues, what they do to create a culture of inclusion, whether they are providing education on LGBT issues, and which companies they have in their supply chains. He says the subject needs to be approached differently in different jurisdictions, too.  

Hamilton Claxton agrees that a broader approach may be necessary when it comes to inclusion. “We've gone more granular on ethnic diversity, but I think the whole point of diversity is, you can't put it in a box – you have to think about it holistically. It's a bit of a false promise to say ‘we're going look at gender this year, then we're going to look at ethnicity, then we'll do LGBTQ’. It's not how the world works. You can’t pigeonhole these things."