Investors using their muscle to get more female directors around the board table.

    Institutional investors are increasing pressure on ASX 200 companies with poor gender diversity in board and management ranks.

    They are pushing corporate laggards to lift female representation on boards and in key management positions – and informing companies that dismiss their concerns that they will vote against the re-election of directors on nomination sub-committees.

    “There’s a lot of work on diversity going on behind the scenes,” says Pru Bennett, Head of BlackRock’s Investment Stewardship team in the Asia Pacific. “We tell companies that if they don’t respond to our engagement with them on diversity, or if they dismiss our concerns, we will vote against the re-election of directors on the nomination committee.”

    For the most part, BlackRock has not had to go public with diversity concerns on ASX 200 companies, says Bennett. “Generally, we support boards if they show they understand the importance of diversity and its alignment with corporate strategy, and are taking steps to address it. But there have been instances of companies overseas that ignored our concerns and lost our vote on directors seeking re-election.”

    BlackRock is a powerful voice in the diversity debate. The United States firm is the world’s largest asset manager with US$6.28 trillion of funds at December 2017. BlackRock engages about 1,500 companies globally each year on Environmental, Social and Governance (ESG) issues and votes on more than 130,000 proposals at over 15,000 shareholder meetings annually.

    Board composition, including diversity, was one of five BlackRock stewardship priorities in 2017-18. The asset manager said last year: “… we will engage companies to better understand their progress on improving gender diversity in the boardroom. If there is no progress within a reasonable time frame (on diversity), we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.”

    The Australian Council of Superannuation Investors (ACSI) has a similar approach. ACSI in 2016 recommended its members vote against boards of ASX 200 companies with poor diversity. ACSI CEO Louise Davidson said at the time: “Companies that still have no women directors, or even worse, no plan to achieve the 30% target, are running out of time and are at serious risk of votes against sitting directors in the near future.”

    ACSI formalised its position in its latest governance guidelines, issued in November 2017: “Our preference is for companies to reform their board’s composition in line with the (30%) target on a voluntary basis… However, our members are also taking action by voting against companies that have made no progress to improve board gender diversity.”

    ASCI’s 38 members manage over $2.2 trillion and on average own 10% of each ASX 200 company. ACSI acted on its diversity guidelines position last year, voting against the re-election of directors of a handful of ASX 200 companies that have poor diversity and airing some of its concerns in the media.

    Voting against the re-election of directors is an important development in the fight for gender diversity on boards. After years of debate, it’s only been in the past 12 months or so that investors have voted against the re-election of directors on gender diversity issues – a trend likely to intensify if ASX 200 companies with no women on their board, by far the minority, continue to resist the push for diversity.

    It is also likely that investors, in time, will focus much more on gender diversity in key management positions – and vote against laggards through director re-elections. BlackRock has long campaigned for gender diversity in key management positions, arguing diversity is more important at management level than executive level given the volume of decision making.

    Also likely is the market extending its focus on diversity to companies outside the ASX 200, possibly to those ranked 200 to 500 by market value. Gender diversity in smaller ASX-listed companies is not followed as closely and there has been less pressure on small companies to follow the diversity lead of their larger peers. That could change in the next few years as institutions invest capital further down the market in search of higher returns.

    1. More changes needed

    Stronger campaigns against diversity laggards are timely. Women represent 26 per cent of directors on ASX 200 boards, according to the latest AICD Quarterly Gender Diversity Progress Report. That is about three times the level in 2009, but diversity progress in 2017 stalled.

    The AICD itself also continues to be a strong proponent of change, maintaining its focus on seeing the boards of the largest listed companies in Australia achieve a minimum representation of 30% women directors by the end of this year.

    The monthly appointment rate of women directors has fallen from 42 per cent at the end of 2016 to 35 per cent. At the current appointment rate, the AICD’s target of 30 per cent female representation on boards of ASX 200 companies by the end of 2018 may not be reached.

    There is good news on diversity. Only eight ASX 200 boards had no women, from 30 in 2015. And 70 boards reached or exceeded AICD’s 30 per cent target at November 2017, double that in September 2015. Association and investor campaigns to improve gender diversity are clearly working, though perhaps not as quickly as was expected last year.

    Martin Lawrence, a leading governance analyst at proxy adviser Ownership Matters, says a plateauing of female representation on ASX 200 boards was likely. “If you go back 20 years, we saw women on boards increase from 5 per cent of ASX 200 companies to 10 per cent fairly quickly, then stay there for a decade before the next big increase which came about from the AICD and ASX making a concerted effort a few years back. There’s a cycle in board appointments that takes time to play out as male directors retire and are replaced by women. But constant vigilance is necessary to ensure we don’t stall at current levels. “

    Lawrence does not expect many ASX 200 companies to be targeted by investors over poor diversity. “Companies have to work hard not to meet the criteria. They would need no women on their board and a very dismissive approach about the benefits of diversity, to force investors to vote against director re-election. Even boards that think gender diversity is a load of rubbish are usually smart enough to say the right things about diversity to the market.”

    Nevertheless, the threat of action from institutional investors is enough to force change, says Lawrence. “The public would be surprised if they knew how many companies appointed female directors after getting pressure from institutional investors. It makes sense for investors to engage with companies behind the scenes and go public with their voting as a last resort on diversity matters.”

    The biggest gains on diversity, says Lawrence, will be from gender pay-gap reporting in companies. “I know some board directors who were horrified when they saw the gender pay gap in their organisation. The very reporting of this information can alert companies and boards that there is a problem on gender pay equity that portrays their company in a very poor light and needs to be fixed.”

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