All this should say two things to investors: firstly, that stewardship is vital because it can help provide an independent voice to challenge the board and ensure the interests of shareholders are represented, creating better outcomes for all; and secondly, that diversity at board level should be a much greater focus of stewardship efforts than it currently is. Today, engagement predominantly focuses on excessive pay, a situation reinforced by the UK Government’s stance. Yet, excessive pay is a symptom of a wider governance problem and tackling that issue alone will unlikely provide a long-term cure. “Remuneration issues are a proxy for broader governance problems,” Powdrill says. “Shareholders spend too much time dealing with compensation.”
Instead, shareholders would do better to focus on board diversity and improving the range of nationalities, genders, social backgrounds, experiences, personality types and skills which should ensure a decision making group consisting of people with cognitive diversity who perceive and process information differently.
The result should be an environment that, by definition, allows for disagreement. “There are clear benefits to having a range of different views,” says Hermes Equity Ownership Services chief executive Colin Melvin.
“The best non-execs are prepared and able to challenge the executive. People who understand companies from different perspectives are very important.” And in an increasingly globalised corporate environment, it is also common sense for company leadership to more fully represent the different interest groups that determine a company’s success, be they employees, customers or suppliers. According to AXA Investment Managers head of corporate governance Shade Duffy: “Many companies have diverse businesses so having a board from one region, for example, creates a gap in how they process information. It should be about looking at where a company is, where it is going and the different skills needed on the board to do that. Looking at it from that perspective should eventually lead to more diverse boards.”
Yet evidence points to a backwards step in diversity in recent years, which poses a significant threat to the pipeline of future board members from minorities, particularly women. Anecdotal evidence from the industry supports this.
Analysis by Colin Gibb, founder of the Gibb Consultancy and The Constellation, a global network of over 7500 senior female executives, shows the number of women getting onto shortlists dropped, particularly at managing director and director level, between 2008 and 2010.
“Maintaining the gender balance has come under pressure as there is no doubt the number of women competing for roles at that level has dropped,” he says. Gibb believes a significant driver of this decline has been the ‘reversion to default’ by head-hunters following two years of very tough business conditions. “In 2008/9 the search market was annihilated,” he explains.
“When it started picking up again, headhunters went back to default settings. If the whole business is under threat for two years, then you see relief, is that the time to play around with the system?”
As a result, he says, where clients had been predominantly taking on male candidates, that is precisely what the head-hunters offered them to increase their chances of successful placings. Evidence also shows investors are failing to fully leverage their most powerful weapon – their vote. Analysis from PIRC found less that 10% of the 175 asset managers signed up to the Stewardship Code published all voting data. But how investors vote is critical in creating an environment that allows disagreement. “It is really important shareholders use their voting rights and speak out where there are issues,” PIRC’s Powdrill says. “If an investor feels like they are a lone voice, they will find it harder to speak out and are more likely to second guess their own opinions.”
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