Howard is Executive Director and Head of Corporate Governance Business Development for MSCI ESG Research. He is a co-founder and former CEO of GovernanceMetrics International, which merged with The Corporate Library and Audit Integrity in 2010 to form GMI Ratings. GMI was in turn acquired by MSCI in 2014. Howard also serves as Treasurer of the IRRC Institute, a not-for-profit organization headquartered in New York City that serves as a sponsor of environmental, social and corporate governance research. He is also a member of the Council of Institutional Investors’ Markets Advisory Council and the Global Advisory Council at Cornerstone Capital Group.
Christopher P. Skroupa: Why do you think diversity at the board level and board refreshment have become such important corporate governance issues?
Howard Sherman: When I began working in the field in 1986, most investors were focused on the question of director independence: is the board truly independent of management? Some believed that there were ties that might cloud the board’s objectivity, therefore lessening their resolve when it came to overseeing management on behalf of the shareholders.
While director independence remains a core governance concern, in recent years the discussion has shifted. A focus on whether the board has the right mix of talent is now a major consideration. This is a very healthy development, and companies are responding by publishing a skills matrix. In my opinion, these matrixes are among the most helpful new disclosures in recent years. For good examples, see the matrixes from Coca-Cola and Prudential.
Boardroom diversity is defined by a diversity of skills, backgrounds and age in addition to gender or ethnic diversity. There is a growing perception that “groupthink” is an investment risk, and that more diversity on boards can lead to more nuanced discussions and more informed decisions. McKinsey Quarterly wrote an article in 2012 about this entitled, “Is There a Payoff from Top Team Diversity?”
A growing body of research has found an interesting link between board diversity and various measures of corporate performance. For example, Credit Suisse found 5 percent outperformance on a sector-neutral basis for companies that had at least one woman on the board from the start of 2012 to June 2014. This amounted to a compound excess return since 2005 of 3.3 percent (Credit Suisse, The CS Gender 3000: Women in Senior Management, September 2014.)
In our own Women on Boards 2014 report, we found that companies in the MSCI All Country World Index (ACWI) with a higher percentage of women on the board had fewer instances of bribery, fraud and corruption, and that companies with at least one female director had a higher Return on Equity. We also found a positive correlation between the proportion of women on a board and our Environmental Social and Governance (ESG) rating of a company. In our Women on Boards 2015 report, we found that companies in the MSCI World Index with strong female leadership generated a Return on Equity of 10.1 percent per year versus 7.4 percent for those without. In addition to this, a superior average valuation (price-to-book ratio of 1.76 versus 1.56) has been found, compared to those companies without strong female leadership. Companies lacking board diversity also suffered more governance-related controversies than average.
The real question is whether this is correlation or causation: does having a significant number of women in leadership positions lead to better outcomes? Or, do companies with relatively good governance see board diversity as a natural extension of how they already operate? Either way, board and senior management diversity is becoming an interesting investment signal for investors attuned to the issue.
Skroupa: How can regulatory efforts promote director diversity?
Sherman: As you probably know, some markets have imposed quotas for female directors, and it clearly works; but only up to a point. The Norwegian quota law, initiated in 2002, was one of the first of its kind, and it heavily influenced other European markets. Now, Norway has the highest proportion of female directorships in the world—approximately 40 percent. France also has a quota, and although the percent of women on board has clearly increased, the number of women serving as board chair hasn’t even budged. This speaks for itself, and it may relate to why we’ve seen many markets—and many women—shy away from quotas, preferring to earn a board seat on merit alone.
The United Kingdom, as is often the case with respect to corporate governance matters, set an interesting example of how to promote change without regulation or quotas. The first Davies Report, released in 2011, recommended that companies mount a voluntary effort to improve gender diversity among its leadership, this included both executives and directors. The report called for the FTSE 100 to target 25 percent of board positions to be filled by women by 2015, a goal that was attained six months ahead of schedule. In an updated review, released in late October, 2015, Davies called for all FTSE 350 boards to have 33 percent female representation by 2020, which would require around 350 more women in top positions.
I think the U.S. presents a tougher challenge. In a well-researched report, the U.S. Government Accountability Office found that although representation of women on the boards of U.S. publicly-traded companies has been increasing, it estimated that “it could take more than four decades for women’s representation on boards to be on par with that of men’s,” even if equal proportions of women and men joined boards each year beginning in 2015. (United States Government Accountability Office, “Corporate Boards – Strategies to Address Representation of Women,” December 2015.)