Other Voices

Fund managers need to flex voting muscles to force boards to appoint more women

May 3, 2015 @ 12:01 am

By Joe Keefe

Mutual fund manager BlackRock Inc. has reportedly revised its proxy voting guidelines and may for the first time oppose the reelection of corporate directors, should it determine that a board's makeup is insufficiently diverse. At a time when only 17% of Fortune 500 board seats are held by women, this new policy by the largest money manager in the world could be a game changer.

Giant fund managers like BlackRock have historically opted for quiet relationships with the companies they invest in, generally voting down the line with company management when it comes to proxy proposals, including proposed board slates. At the same time, a growing number of asset managers engaged in sustainable investing — which incorporates environmental, social and corporate governance considerations into investment portfolios — have consistently opposed all-male board slates, arguing that diverse boards better serve shareholders.

A compelling body of research suggests that where women have greater representation on boards, companies simply perform better. A 2014 Thomson Reuters report concluded that, on average, companies with no women on their boards underperformed relative to gender-diverse boards and had slightly higher tracking errors, indicating potentially more risk. A 2012 Credit Suisse AG report found that companies with women directors outperformed those without women directors in return on equity, average growth and price/book value multiples. A Catalyst Inc. study found that companies with three or more women directors outperformed those with no women directors as measured by return on equity, return on sales and return on invested capital, while McKinsey & Co. found that more diverse management teams deliver higher returns for shareholders across industries.

SHAREHOLDERS' BEST INTERESTS

In other words, board diversity is in the best interests of shareholders — your clients — because diverse leadership teams tend to perform better than nondiverse leadership teams.

My company has long had a proxy voting policy on board diversity providing that, in most cases, we will not support a board slate unless it includes at least two women. Since 2010, we have voted against or withheld support for director nominees at more than 800 companies due to insufficient gender diversity. We have then registered our concern with these companies by writing them a letter explaining our “no” vote and why a diverse board is in the best interest of shareholders. Other firms in the sustainable investment arena, including public pension funds, labor unions and religious organizations, have adopted similar policies.

Many of these activist managers, together with some of the nation's most prominent women's organizations, joined together to form the Thirty Percent Coalition, which wrote letters to each company in the S&P 500 and in the Russell 1000 that had no women on their boards. At least 17 of these companies have since added women to their boards. So far this year, coalition members have filed shareholder resolutions with nearly 50 companies, asking them to adopt policies on board diversity or grant shareholders access to the proxy ballot for purposes of nominating directors.

Until now, however, it has been a relatively small handful of activist investors pressing companies on board diversity. The overwhelming majority of money managers either don't vote their proxies at all or vote in tandem with management's recommendations. Four years ago, frustrated that our numbers weren't large enough to force companies to listen, my company launched a “Say NO to All-Male Boards” campaign, asking other investors to join the fight. I personally wrote to 165 of the nation's largest mutual fund CEOs, pension fund fiduciaries and women's colleges and universities, asking them to adopt proxy voting policies withholding support from non-diverse boards. I didn't get much response.

IMPROVED BUSINESS RESULTS

But a lot has happened since then, and there is now a robust body of research supporting the correlation between diverse business leadership and improved business results.

That's why BlackRock's recent announcement is so significant. BlackRock has seen the research. They clearly get it. And if large, mainstream mutual fund managers like BlackRock take the position that board diversity matters, companies will listen. Those companies in particular who have been recalcitrant in embracing gender diversity will begin to feel the pressure.

Women today may hold only 17% of board seats, but we have to understand that these boards are elected each year at companies' annual general meetings. Advisers should inform their clients that they have an opportunity to make their voices heard. Unfortunately, most people are still invested though financial intermediaries who either don't vote their proxies at all or vote down the line with company management, routinely rubber stamping all-male boards.

This needs to change. Advancing women in corporate leadership is not only the right thing to do, it's the smart thing to do. Companies with diverse boards perform better for their shareholders. Seventeen percent is no longer acceptable. Gender inequality in the boardroom is no longer acceptable. BlackRock has decided to be part of the solution. It's time for other mutual fund managers to follow suit, and financial advisers are one key group to influence the change.

Joe Keefe is CEO of Pax World Funds and the Pax Ellevate Global Women's Index Fund.

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