It is widely accepted by way of empirical research and good governance standards that diversity helps create long-term shareholder value. The belief behind this is that a group of individuals from a diverse range of backgrounds are more likely to make stronger decisions and avoid the dangers of ‘group-think’.
It is also good business sense that company board members, as well as possessing expertise in key risk areas such as legal and financial, should be able to relate to the company’s clients. Diversity is also a lead indicator of wider corporate culture. Too often we have seen companies fail or make poor decisions when the board is populated with directors unwilling or unable to challenge a single domineering personality.
Female participation in the global workforce is unequal, and a key area of inequality is in senior corporate positions. Women occupy just 25% of board seats in MSCI World Index companies.1 We do not have a full data set available to us at the management level, but we would expect similar findings. While we acknowledge there are cultural reasons which have historically prevented women from reaching senior positions in business, we do not believe this level is acceptable in 2020.
Our first-hand experience of performing company research has also found that company disclosure on diversity is poor. This includes basic workforce statistics and details on policies. Not only does this make it hard for us as investors to assess a company’s culture, but it also makes it difficult for prospective employees to do the same. Employees are attaching increasing weight to a company’s diversity and inclusion performance, and not only will companies which perform poorly fail to attract the best candidates available, but those companies which do not disclose their efforts are also likely to suffer.
We do not just see this is a risk to shareholder value as we discuss above, but we believe that enabling gender equality at all levels of society is the responsibility of companies and their investors. For example, research by McKinsey Global Institute found that increasing female participation in the workforce could increase GDP by $12 trillion by 2025.2 In fact, this is seen as such an important global objective that the UN has dedicated one of its Sustainable Development Goals solely to gender equality.
Therefore we are focusing on two objectives where we believe the most shareholder value lies, and where we can have the most influence as investors:
- Encouraging companies to increase the participation of women at senior levels by growing the pipeline
- i) Where a company has a diversity strategy but disclosure is poor, encouraging the company to improve disclosure;
ii) Where a company has no diversity strategy, encouraging the company to develop one and disclose it
Our voting and engagement policy
Our policy intends to address the two objectives listed above.
As part of the research conducted ahead of a company’s AGM to inform our voting decisions, we will look at two key indicators:
- A company’s publicly disclosed diversity and inclusion policies
We expect a company to provide basic public disclosure on its diversity and inclusion policies and practices, not just in relation to gender but encompassing a wider understanding of diversity. We expect to find this on the company’s corporate website, its careers page and in its annual report (or corporate social responsibility report).
- The gender split of a company’s board, and any other workforce data disclosed
When examining workforce data, we believe it is appropriate to split our policy geographically to account for regional differences. At board level, in countries where we believe gender diversity can be reasonably expected, we look to find at least 30% of board seats being held by women. In countries where gender diversity is less well established, we expect to see progress towards the 30% level and to see diversity as a consideration in the board member nomination process.
We firmly emphasise that 30% does not represent a mandatory quota, and we will judge each company on a case-by-case basis, in the context of its geography and industry, as well as any other workforce data it discloses. We also appreciate gender is not the only measure of diversity; however, it is the only one universally disclosed at board level, and therefore the only one on which we can vote at present.
Voting action scenarios
- In countries where diversity is better established
If a company meets neither our board gender diversity criteria nor our disclosure requirements, we will vote against the chair of the nomination committee and engage with the company. If a company fails one of our criteria, we will engage to explain our policy and vote against the chair of the nomination committee in future years if we see insufficient progress.
- In countries where diversity is less well established
If a company fails any or both of our criteria, we will engage to explain our policy and vote against the chair of the nomination committee in future years if we see insufficient progress.
Engagement in practice
Recent examples of our voting and engagement activity related to diversity include:
- ABB (AGM, March 2020): We voted against the chair of the nomination committee owing to insufficient board diversity and no robust policy or targets in place to address this issue.
- Amazon (AGM, May 2020): We supported three resolutions related to improving disclosure around diversity where a lack of disclosure currently exists and potential controversy is present.
- Home Depot (AGM, May 2020): We supported a resolution asking the company to prepare a report on diversity which would include diversity statistics and initiatives.
- National Express (January 2020): We met with National Express to discuss diversity and inclusion, which brought to light a number of pragmatic and interesting business practices aimed at improving culture and talent retention. However, we stressed the importance of enhancing public disclosures on such practices, otherwise they cannot act as a means of competitive advantage when seeking to attract talent.
- Toll Brothers (AGM, March 2020): While we voted against the chair of the nomination committee in 2019 owing to a lack of board gender diversity and a lack of overall disclosure on workforce diversity, following positive engagement with the company we did not repeat this action at the 2020 AGM. The company explained to us that it is actively seeking to add a third woman to its board, and was very receptive to our encouragement to improve disclosure.
1 Women on boards: 2019 Progress Report, MSCI (https://www.msci.com/documents /10199/29f5bf79-cf87-71a5-ac26-b435d3b6fc08), December 2019
2 How advancing women’s equality can add $12 trillion to global growth, McKinsey Global Institute (https://www.mckinsey.com/featured-insights/employment-and-growth/how-advancing-womens- equality-can-add-12-trillion-to-global-growth), September 2015
Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.
This is a financial promotion. These opinions should not be construed as investment or any other advice and are subject to change. This document is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that portfolio holdings and positioning are subject to change without notice. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN. Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances. Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia. ‘Newton’ and/or the ‘Newton Investment Management’ brand refers to Newton Investment Management Limited.