Firms encouraged to address “compulsive homogeneity”, but investor influence for change limited by own challenges.
Top-level recruitment processes at UK firms are “distorted” at a time when investors are increasingly willing to vote against directors responsible for homogenous boards.
A joint report from the Chartered Governance Institute UK and Ireland (CGI) and consultancy Centre for Synchronous Leadership (CSL) says a lack of diversity on boards is viewed by investors as a proxy for having an insular culture.
The report claims an “attachment to power” is influencing selection, with more diverse candidates excluded based on flawed selection processes and criteria. There is an assumption that candidates who do not resemble existing board and committee members are less “impressive”.
Meaningful progress on improving boardroom diversity can be achieved only if boards and executive committee members are willing to address this “compulsive homogeneity” and prioritise purpose over power, it added. Board homogeneity can be mitigated by board refreshment, effective accountability and cultivation of the board candidate pipeline.
“When there is a healthy flow of power, staff at all levels are engaged in decision making. Their position in the hierarchy does not constrain their ability to add value. There is also a willingness to subject directors and executive directors to standard levels of scrutiny, facilitating the evolution of social norms,” said the report.
Limits of investor influence
Justine Lutterodt, Managing Director at Centre for Synchronous Leadership and author of the report, said institutional investors have had an impact on the conversation about boardroom diversity and ESG, helping to keep it on the agenda in many companies. “This pressure has reduced the psychological distance of directors from this issue,” she said. “The importance of pressure from investors came up repeatedly in our qualitative interviews. It was also clear from our secondary research that most directors and executives (around 85%) believed that board diversity would improve their relationships with investors.”
Questions remain over the impact of investor pressure, she added, given competing priorities and deeper factors at play. The report suggests the most insular boards are self-conscious about their low levels of demographic diversity, with two thirds believing it is hindering decision making. However, this does not translate into diversity being prioritised, which would require them to reconsider the status quo and the flow of power in the boardroom, said Lutterodt.
“In one of our discussions, a female director expressed frustration with the hypocrisy of institutional investors bringing in an all-male team to ask about boardroom diversity and ESG. The questions these investors asked still had an impact, and my own opinion is that institutional investors should keep the pressure up regardless of whether their own house is in order,” she explained.
“However, it is hard to imagine that investors who have not done any self-reflection on this topic would have the skill to ask more nuanced questions or to differentiate between a company that has truly embodied ESG from one that has addressed this at a surface level. The latter is unlikely to reap the benefits and a box-ticking approach could potentially result in organisational backlash.”
While the investment management sector itself has “exceptionally poor stats in relation to diversity”, Lutterodt senses growing levels of self-reflection amongst investment management firms. This is being matched by a shift in attitude amongst board directors in how they view investor engagement on board diversity and ESG, said Lutterodt.
“Institutional investors who seek to have higher impact in influencing change must be willing to look at themselves and partner with companies in a more sophisticated and authentic manner when it comes to ESG and diversity,” she said.
Fidelity updates diversity policy
Global asset manager Fidelity International (US$787.1 billion AUM) this week updated its Sustainable Investing Voting Principles and Guidelines, introducing new global policies on climate change and gender diversity aimed at holding investee companies to account. Fidelity has said it will use its right to vote against boards that “do not meet expectations”.
Fidelity will engage and consider voting against company management in most developed markets that do not have at least 30% per cent female representation on the board of directors. In markets where standards on diversity are still developing, an initial 15% threshold is targeted.