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Commentary

Investors Must Adopt Tailored Approach to Deliver on Diversity

Therese Kieve, Stewardship Analyst at Sarasin & Partners, outlines mechanisms investors can utilise to tailor engagement to effect change and deliver on diversity and inclusion.

A diverse and inclusive workforce is increasingly a priority for companies and their employees – and for good reason. Research indicates diverse executive boards help guard against groupthink, facilitate input from a range of perspectives, and offer a wider talent pool for candidate selection. A diverse board is also better able to understand the needs of a diverse customer base, ensuring a company’s management is aligned with end consumers.

If the carrot is not enough, the stick may provide the impetus for change. NASDAQ board diversity rules now require most listed companies to have at least one female director and at least one director that is a member of an ethnic minority or the LGBTQ+ community. In the UK, the FCA has set targets requiring at least 40% of board members to be female, with at least one senior board position to be occupied by a woman. Additionally, at least one board member should come from a minority ethnic background.

However, making progress on diversity targets can be challenging, not least because there is a high level of variability between regions. Countries with mandatory gender quotas are making fast progress. Voluntary targets, such as the UK’s best practice board-level quota of 33%, are also effective. In 2022, women held 38% of board seats in the UK, with Western Europe coming in at 35.5% and the US at 30.4%. In Asia, the picture is different. In South Korea, only 10% of board seats were held by women in 2022, and in China only 11.9%.

Diversity also varies by industry. Companies within the healthcare, consumer staples and utilities sectors score highest on board diversity, while those in energy, materials, IT, industrials and financials lag significantly. This means a standardised approach to engagement is unlikely to be effective.

Take the tailored approach

We have identified three mechanisms through which investors can effect change. The first is tailored engagement for laggards. In 2021, several companies on our buy list had a lack of diversity at board level. Having written letters to these companies to express our concerns, we developed tailored engagement plans for companies that had not responded, employing tools such as letters to the chair, proxy votes and follow-up letters, and calls and meetings.

The second is a tougher voting policy for gender diversity and an ethnic diversity voting policy. Voting is one of the core levers shareholders have to drive change, so we regularly review our voting policies to ensure they evolve along with our thinking and hold directors to account. In 2022, one of the key changes we made to our policy was to include our expectation that UK and US companies have at least one director from an ethnic minority background. We also expect at least 30% gender diversity at the board level (33% for the UK).

Lastly, we are a signatory to the 30% Club UK Investor Group and support both its engagements and targets, which require beyond 30% female representation, and at least one person of colour on FTSE 350 boards and executive committees by the end of 2023, with half of those board seats allocated to women of colour.

Our tailored engagements have been successful. In 2021, we wrote to 24 key companies, achieving a response rate of about 80%. Seven of these companies now meet our guidelines and three more have made meaningful progress. Our engagement with Mastercard, for example, had a considerably positive impact. We met with the LID and chief inclusion officer in 2021 to discuss our expectations. We were reassured diversity was a top priority and were pleased to see the board complete a refresh in 2022, with an emphasis on diversity and independence. The board now meets our expectations, but we will continue to engage with Mastercard and other companies on pay equity.

The next step

Beyond fostering increased board diversity, investors need also focus on tackling pay inequality – a closely related but under addressed issue. This means ensuring employees are paid fairly and equitably, regardless of gender or ethnicity. Investors should press for transparent compensation processes and regular pay equity analyses to ensure any pay disparities are addressed.

We lead the 30% Club’s UK Investor Race Equity Working Group, which fosters collaborative investor engagement with UK public companies to advance diversity and inclusion efforts and enhance transparency and accountability around race equity within the workforce. The UK has made considerable progress in this area in recent years, and investors must now leverage these learnings to drive progress in other regions yet to see meaningful progress.

With this in mind, investors must be considerate of the unique cultural, ethnic and legal factors that impact diversity and inclusion in different countries. While progress has been made in the UK, Europe and the US, there remain many countries where diversity and inclusion is not yet a priority. This is particularly the case in emerging markets, where economic growth has resulted in a rapidly expanding workforce, but where diversity and inclusion initiatives are not fully established.

By engaging with senior leadership, pressing for tangible actions to support diversity, tackling pay inequality, and recognising unique regional challenges and opportunities, investors can take meaningful steps to promoting diversity and inclusion across the globe.

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