April 2, 2018
Much more than an emerging trend, increasing diversity on Boards of Directors has become one of the most important corporate governance issues of the 2018 proxy season. Many investors are beginning to insist on diversity, especially gender diversity, and are willing to oppose Boards and companies that cling to the status quo.
At year-end 2017, women occupied 16.5 percent of Board seats at Russell 3000 companies, according to Equilar’s Gender Diversity Index. Essentially, one of every six Board members, or two of every 12 Board members, is a female. This is up from 15.1 percent a year earlier. Equilar estimates that women are on pace to achieve Board parity by 2048.
Equilar also reported that the number of Russell 3000 Boards with no women dropped from nearly 25 percent in 2016 to 20.8 percent at the end of 2017.
The pace of change is accelerating, but apparently not fast enough for many investors and their advisers. In his August 31, 2017, open letter to directors of public companies worldwide, Vanguard Chairman and CEO F. William McNabb III wrote that gender diversity on the Board is “an economic imperative, not an ideological choice” because “there is compelling evidence that boards with a critical mass of women have outperformed those that are less diverse.” In addition, BlackRock recently said for the first time that companies in which it invests should have at least two female directors.
Also noteworthy for the current proxy season is the fact the New York State Common Retirement Fund and the California State Teachers’ Retirement System have pledged to oppose the re-election of all directors at companies that do not have at least one female Board member, according to a March 20, 2018, Wall Street Journal article (subscription required). (The state pension funds of Massachusetts and Rhode Island already had similar stipulations). The article also published a list 45 companies in the Russell 1500 that have not had a female Board member since 2006, according to an analysis by Equilar.
Proxy advisory firms Glass Lewis and ISS appear to be gearing up for a major push on the issue over the next few years. ISS recently noted that “many investors have joined global initiatives that aim to achieve 30 percent gender diversity at public company boards by 2030. However, at the current rate of female director nominations, humans (male and female) may reach Mars before we reach 30 percent female representation on U.S. public company boards.”
In its 2018 proxy guidelines, Glass Lewis said, “In 2018, we will not make voting recommendations solely on the basis of the diversity of the board. Rather, it will be one of many considerations we make when evaluating companies’ oversight structures. Beginning in 2019, however, Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members. Depending on other factors, including the size of the company, the industry in which the company operates and the governance profile of the company, we may extend this recommendation to vote against other nominating committee members.”
Gender diversity on the Board is not an emerging trend. It is here now and, as more and more baby boomers retire and a new generation of highly qualified, diverse Board candidates steps forward, Board parity may be closer than you think at many companies – not waiting until 2048. For those still struggling with Board diversity, no matter the industry, you are, and will continue to be, under pressure to catch up.