Industry

FTSE 100 Directors Face Vote Threat Over Racial Diversity

Institutional investors call for board-level representation in line with Parker Review.

Asset owners and managers worth almost £12 trillion could vote against directors at the upcoming AGMs of FTSE 100 firms that fail to improve racial and ethnic diversity on their boards.

The investor group of the 30% Club’s UK chapter served notice of its intentions in a letter sent to FTSE 100 firms which have not yet met the requirements of the Parker Review.

In a joint statement, the group said it was willing to engage with board chairs, nomination committees and executive teams on racial inequality in leadership roles and across the workforce.

“Where insufficient progress is made against targets, we may consider voting against the re-election of board directors,” the statement added.

The Parker Review requires at least one person from a minority ethnic group to be appointed on every FTSE 350 board. As a gender-focused initiative, the 30% Club also advocates for gender balance, calling for half these seats to be filled by women.

Research by the Parker Review committee published last March found that 74 FTSE 100 firms had ethnic minority representation by November 2020. FTSE 250 constituents were due to be surveyed at the end of 2021 and have until 2024 to achieve ethnic minority board level representation.

An update is expected to be published by the Parker Review committee on 16 March.

Better investor outcomes

Investor group member organisations with £11.7 trillion AUM also backed new 30% Club targets for 2023, which call for members at FTSE 350 firms to go beyond 30% representation of women on boards and executive committees.

“We believe boards that genuinely embrace cognitive diversity, as manifested through appropriate gender and racial representation and a broad spectrum of skills and experience, are more likely to achieve better outcomes for investors,” said the investor group statement, which noted the importance of diversity to sound decision-making, adaptability to change and creation of long-term value.

According to updated shareholder priorities issued ahead of the 2022 AGM season by the Investment Association, FTSE 100 firms which have failed to meet Parker Review targets will be subject to a ‘red top’ warning for the first time.

This is used to reflect the highest level of concern for members, which collectively manage £9.4 trillion. The association will also issue a red top to FTSE 350 firms with 33% or less women on their boards or 28% or less on their executive committees.

In its recently updated annual Stewardship and Voting Guidelines, the Pensions and Lifetime Savings Association (PLSA) also warned FTSE 100 companies that are failing to meet the Parker Review target “should expect to see this challenged by investors”.

Data demands

The investor group of the 30% Club’s UK chapter also asked for UK listed companies to improve transparency and accountability on diversity and inclusion performance, calling specifically for firms to report racial and ethnic diversity data “on par with current gender diversity disclosure”.

Investors further encouraged firms to set out how they plan to increase racial diversity and inclusion in their workforces, recommending that firms consider use of ‘race action plans’ and ‘balanced scorecards’ reflecting ethnic representation.

The group has been working on improving the availability of data on race equity within the FTSE 100 by engaging with ESG data providers and supporting the creation of new data platforms, such as through its partnership with Diversio, an AI-based platform that measures, tracks, and improves diversity & inclusion.

Investors currently struggle to obtain accurate and comparable data on gender, ethnic and other forms of employee diversity from investee corporates as it is rarely mandated by regulation.

“Stark warning”

Diandra Soobiah, Co-chair of the 30% Club UK Investor Group, said failure by firms to take diversity seriously represented a “stark warning” to investors about their long-term sustainability.

“Time is up for organisations that seek to simply tick boxes. The 30% Club Investor Group is putting FTSE companies on notice – the laggards need to do much better, and we’re willing to help,” said Soobiah, also Head of Responsible Investment at Nest, which has £17.6 billion AUM.

“We all have an important role to play to ensure persistent race inequities in business and our society are addressed. As investors, we can have stronger dialogue with the companies we invest in, with a view to improving diversity and inclusion within companies in the UK.”

The 30% Club is a global campaign aimed at increasing gender diversity to a minimum of 30% at the board and executive committee levels of large corporates.

The statement issued by 30% Club’s UK Investor Group was signed by asset owners including Border to Coast Pensions Partnership, Brunel Pension Partnership, Environment Agency Pension Fund, Japan’s  Government Pension Investment Fund (GPIF), LGPS Central, Local Authority Pension Fund Forum, Nest, RPMI Railpen Investments, the West Midlands Pension Fund and West Yorkshire Pension Fund.

Asset manager signatories included abrdn, Aviva Investors, AXA Investment Managers, BlackRock, BMO Global Asset Management, Federated Hermes, J.P. Morgan Asset Management, Jupiter Asset Management, Legal & General Investment Management, M&G Investments, Newton Investment Management, Robeco, Royal London Asset Management, Sarasin & Partners and T. Rowe Price.

The UK chapter of 30% Club introduced race and ethnicity targets in July 2020, requiring members in the FTSE 350 to having at least one person of colour at board and executive committee level by the end of 2023, with at least half of those appointments going to women of colour.

Investors’ diversity commitments

The UK investor group of the 30% Club said institutional investors should make similar commitments to advance diversity and inclusion within their own organisations. In August 2021, a group of UK asset owners with more than £125 billion AUM issued an Asset Owner Diversity Charter to tackle a lack of diversity across the fund management industry.

The CFA Institute, the global association of investment professionals, recently launched a voluntary Diversity, Equity, and Inclusion Code for the Investment Profession, which requires signatory organisations to commit to six metrics-based principles aimed at fostering greater inclusion. The initiative was launched in the US and Canada, but the CFA said it intends to extend to other markets.

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