Skroupa: What are shareholders doing to promote board diversity and board refreshment in general?

Sherman: There are a number of noteworthy efforts in this area, too many to mention here, but the 30% Club in the U.K. was launched in 2010 with a goal of achieving 30 percent women on FTSE 100 boards by the end of 2015. This action is based on the principle that, “gender balance on boards not only encourages better leadership and governance, but diversity further contributes to better all-round board performance, and ultimately increased corporate performance for both companies and their shareholders.” The group was founded by Newton Investment Management CEO, Helena Morrissey, and supports voluntary efforts over quotas. It has sparked similar efforts in other markets, including the Thirty Percent Coalition in the United States.

With regard to board refreshment, an effort has surfaced in the United States called “proxy access” which would allow qualified shareholders to nominate directors. This endeavor is led by the Office of the New York City Comptroller, which manages the city’s five pension funds. It’s had notable success with its proxy access efforts. The need for reform in the U.S. may come as a surprise to shareholders in markets like Italy and Sweden, where shareholders are heavily involved in the nomination process. I recently met with a client in Stockholm, who told me that he was a member of eight separate nominating committeessimply unheard of in the United States.

In recent years, a focus on board tenure has risen. CalPERS, State Street Global Advisors and the United Kingdom’s Legal and General Investments have advocated new ways of thinking about board tenure and independence as part of the board refreshment process. Earlier this year, CalPERS approved revisions to its Global Governance Principles, which require that companies take a comply-or-explain approach to the issue of long-tenured directors. Companies with a director that has served on the board for more than 12 years have two options: they could either classify the director as non-independent, or they could disclose a basis to continually deem him or her as independent each year. State Street compares its portfolio holdings to the average market tenure, to see if the average board tenure for each company that they own is above one standard deviation from the average market tenure, or if one-third of the non-executive directors have tenures longer than two standard deviations. According to State Street Global Advisors (SSGA), it expects “long-tenured directors to refrain from serving on the audit, compensation and nominating governance committees on boards of companies with high average director tenure.” (“Addressing the Need for Board Refreshment and Director Succession in Investee Companies,” SSGA, February 2015.) Legal & General Investment Management announced that in 2017 it will begin to vote against the chair of the nomination committee for an array of reasons, such as: if the average tenure of the board is 15 years or more, there has not been any new board appointments for 5 years or more, or if the key board committee members and/or the lead independent director have been serving for 15 years or more.

Issuers need to be aware of this significant development. Why does it matter? Besides the connection to board diversity, a study orchestrated by Harvard Business Review found a correlation between board turnover and overall company performance.  It looked at board turnover at 500 large-cap U.S. companies from 2002 to 2013, they examined company performance over a subsequent three-year period, and found that the worst performers were companies with either no director changes, or more than five changes. (George M. Anderson and David Chun,”How Much Board Turnover is Best?”, Harvard Business Review, April 2014.)

Finally, a new push for ethnic and LGBT diversity has emerged. On June 1st, officials representing twelve U.S. public pension funds issued a joint statement calling on U.S. companies to “cast wide nets in their search for the best talent and include nominees who are diverse in terms of race, gender, and LGBT status.” The signatories included treasurers and comptrollers for California, Chicago, Connecticut, Illinois, Maryland, Massachusetts, New York City, New York State, Oregon, Philadelphia, Rhode Island and San Diego County. Another push comes from the United Kingdom. The Labour MP and former shadow business secretary, Chuka Umunna, have urged other ministers to set a target for ethnic minority representation on FTSE 100 boards. Mr. Umunna called for “no all-white boards by 2020” and for companies to be required to divulge the ethnic breakdown of their board rooms.

Skroupa: What can you tell us about the MSCI ESG Research Diverse Director DataSource (3D)?

Sherman: This is another important initiative, and it serves as a resource for board nominating committees or search firms who are looking for “non-traditional” board candidates. It was developed with the help of CalPERS and CalSTRS, who were interested in creating a candidate pool that extended beyond the traditional profile of mostly sitting CEOs. It costs nothing for a candidate to enter their credentials and there are now over 800 approved candidates in the database. Approximately two-thirds are women and the same percent have not-for-profit, private or public board experience; 37 percent have undertaken some type of board training; and 13 percent indicate they have the necessary financial expertise to serve on an audit committee. It’s a truly impressive group!


On December 8-9, 2016, Skytop Strategies will present, “Gender Equality in the C-Suite & Boardroom 2” in Chicago, IL. We will be holding a fact-based, research centric discussion on investor demand and regulatory intervention in regards to gender equality in the C-Suite & Board Room with a focus on best practices in the United States. This includes a look at the leverage provided by institutional shareholders, boards, and CEOs in creating high performing gender diverse companies. To see our developing program agenda, visit: https://skytopstrategies.com/gender-equality-in-the-c-suite-and-boardroom-2/