Investors Warn Corporate Boards on Diversity

Slowly but steadily, investors are letting corporate boards know that “male, pale and stale” doesn't cut it anymore.

The small but growing number of shareholder votes on diversity proposals is on pace to match or exceed the record set last year, according to data compiled by ISS Analytics, which tracks proxies. Apple and Tyson Foods investors already rejected such proposals, and another eight are in the queue.

The $309.7 billion California Public Employees' Retirement System has made diversity proposals a priority in its proxy voting, aiming to break companies “out of the group think of male, pale and stale,” said investment director Anne Simpson. “As evidence grows on this and fund managers focus on building diversity even in their own organizations, I think we're going to see support on this moving up.”

In each of the last five years, more than 20 board diversity proposals have been brought to U.S. companies, encouraging some to change their policies and avoid a public referendum. IBM and CVS have already done so this year — explicitly stating they will consider gender and racial diversity in their board appointments. CVS confirmed the changes. IBM declined to comment.

A vote doesn't predict success — in fact, the opposite. Of the nine proposals that came to a vote last year at companies including Apple Inc., LinkedIn Corp. and Skechers U.S.A. Inc., the only one to pass was at FleetCor Technologies Inc. On average, the proposals earned about 25% support, according to ISS.

BlackRock Advisors Inc. and Vanguard Group Inc., the two biggest funds by assets under management, rarely vote for shareholder proposals on diversity topics. Both firms say they prefer to engage privately with companies.

“The vote is but one mechanism we have to message the companies,” said Glenn Booraem, Vanguard's head of corporate governance. “Our direct engagement with companies has the benefit of being far more nuanced than voting for or against a proposal.”

BlackRock spokesman Ed Sweeney noted the company's commitment to various initiatives to raise the number of women in governance and executive leadership. “When we speak with company management and independent directors, we emphasize diversity and inclusion as key components of corporate culture and strategy,” he said.

Morgan Stanley Investment Management Inc. and T. Rowe Price Associates Inc., on the other hand, vote for diversity proposals far more often. Morgan Stanley had no comment other than to refer to its proxy voting policy that says it considers such proposal on a case-by-base basis.

“We tend to support most of these proposals on the rare occasions when we are voting on them,” Donna Anderson, a vice president and global corporate governance analyst at T. Rowe Price, said in an interview. “We think the business case is pretty strong that bodies with diverse views, including boards, tend to make better decisions than non-diverse groups.”

Moving the Needle

At the current pace of gains, women aren't forecast to hold 50% of board seats until 2055. The number of people of color appointed as directors fell in 2016 and the overall rate of minorities serving on boards has been mostly unchanged over the last decade, according to executive recruiter Spencer Stuart.

As of now, 13% percent of companies give specific details about the race and gender of directors named in their annual filings, said Belen Gomez, senior director of research at Equilar Inc., which tracks diversity disclosure. “The needle is moving, but it's moving slowly. I do think things are going to ramp up.”

NorthStar, based in Boston, filed six proposals this year asking companies to adopt language that they would seek greater board diversity. All six agreed to add specific wording and the fund withdrew the proposals, said Mari Schwartzer, assistant director of shareholder activism, engagement and social research at the fund.

“Companies think that they already have initiatives in place to ensure diversity,” said Ivy Jack, director of equity research at NorthStar Asset Management, which brought the proposals to IBM and CVS Health Corp. “We look at it and say, 'Even if you have already been doing it, maybe you need to do it differently, or you're not doing it enough, because your board still does not represent your customers, or just the general population of the country.'”

Bloomberg News

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