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Week 7 Reporting

Investors Agitating for Change are Pushing Equality to the Forefront of Corporate Concerns

A growing group of investors, including activists funds and institutional asset managers, are demanding transparency, diversity and gender equality. Companies have no choice but to pay attention.

The days of deep-pocketed investment firms keeping their opinions to themselves about the lack of diversity and equal pay in the workplace are over. 

These days, powerful investors ranging from activist funds to big institutional asset managers that oversee trillions of investment dollars are raising their voices to a new decibel and taking high-profile public stances in support of greater diversity and inclusion. The message they are sending to companies they own big equity stakes in can be summed up in three words: Diversity is good. 

Good for workers. Good for business. And good for investors. 

Agitating for change and nudging corporate America to give women, people of color and other underrepresented groups a fair shake at the office is becoming as common at investment firms as picking stocks or criticizing a CEO for weak quarterly earnings. Investors, many with activist streaks, are flexing their financial muscles via shareholder resolutions, proxy votes and public outcry to “shine a spotlight” on D&I issues like pay gaps, the dearth of female CEOs and board members, and an overall lack of diversity in the workplace. In the era of #MeToo, the “Fearless Girl” and Colin Kaepernick’s kneeling protest, the actions of investors are telling diversity advocates: “We got your back.”

This investor push for greater transparency, disclosure and engagement from employers on this important social – and economic – issue marks a seismic shift that has thrust the D&I debate into the mainstream. Investor activism, diversity proponents say, is morphing into a transformative force in the push for gender and pay equality in the workplace. 

“Gender diversity activism is entrenched in the marketplace,” says Jon Lukomnik, a senior fellow at Boston-based think tank High Meadows Institute and managing partner at Sinclair Capital. It’s in the best interests of targeted companies, he believes, to listen and respond to critics who say they’re not doing enough to level the playing field at work and are harming their business prospects as a result. “You can survive being a dinosaur for some period of time. But eventually the more diverse companies will outcompete you and outperform you. Why would you want to put yourself in that position?”

Investor activism, while not new, is emerging as a key change agent in the fight to narrow the gender gap. Equal representation for women in corporate leadership has advanced in recent years, but still has a long way to go when you consider that only 5 percent of companies in the Russell 3000 stock index in 2018 had a female CEO, up from 3 percent 10 years ago, according to Institutional Shareholder Services.

Consider Arjuna Capital. In January, the activist fund pressured Citigroup to release median company-wide data that revealed women at the bank make 29 percent less than men. The shareholder advocate continued its offensive last month, naming 11 more big banks and tech giants, including JPMorgan, Google and Facebook, that it will target this year with shareholder resolutions focusing on “median gender pay gaps,” a data point it says better highlights how few women work in higher-paying positions. “One down, 11 to go,” Arjuna noted in its press release

Trillium Asset Management, which has filed roughly two dozen shareholder resolutions in the past few years tied to increasing the number of women and people of color on boards, is also touting successes. Fifteen of those targeted companies have appointed women to their boards, says Trillium VP Susan Baker. And earlier this year, Trillium withdrew proposals at Bank of New York Mellon and F5 Networks after the companies agreed to expand reporting and disclosures tied to their diversity practices. 

Activist firms like Trillium are also increasingly highlighting the fact that minorities of all types are underrepresented on boards and are working to change that. “Investors want to understand if companies have the right board process … and optimal mix of members to effectively govern,” Baker says. “While the focus on board composition has seen a lot of momentum in recent years, more needs to be done. Investors can withhold votes from boards that are not diverse across all dimensions of diversity, inclusive of race and ethnicity. [They can also] press companies to … commit publicly to include women and people of color in each board candidate pool.” 

Baker adds that the growing trend towards companies releasing more diversity- and gender-related data not only makes it easier to hold executives and boards accountable, it also opens up the lines of communication that can lead to meaningful dialogue and better corporate performance. In a sign that the pressure being applied is working, a record 48 percent of proxy resolutions focused on environmental and social issues were “withdrawn” in 2018 and votes supporting ESG proposals hit a record 36 percent, nearly double the amount in 2013, ISS data show.

“Transparency is the beginning stage of acknowledgment” that there’s a problem and a need and room for improvement, Baker told D&I In Practice. “From corporate disclosures, we get a sense of where [companies] are and we can have a more substantive conversation on where they want to go and what they need to do to get there.” 

While not explicitly in the activist camp, many of the world’s largest asset managers, such as BlackRock and State Street Global Advisors, are also leading the fight for workforce diversity by pressing for greater female representation on boards. State Street, the driving force behind the defiant “Fearless Girl” bronze statue that now sits across from the New York Stock Exchange, for example, uses its proxy voting power to effect change at companies that fail to take action on diversity.

Beginning in 2020 in the U.S., the company has said it will “vote against the entire slate” of board members on the nominating committee if a company “does not have at least one woman on its board” and has “not engaged in successful dialogue” with the firm on diversity for three straight years. Mutual fund giant Vanguard, whose index funds invest in nearly every publicly traded stock, has also called for more diverse boards, further pushing the gender issue to the forefront.

“These name-brand traditional asset managers are leading the charge,” Lukomnik says.

Data on diversity says it’s better for business 

The investors pushing companies to embrace diversity have data on their side when making the case that it’s better for business. 

Research shows that companies with greater levels of gender diversity have stronger financial results, ranging from better stock performance to stronger profitability. A study by the Conference Board in 2017 suggests that the reason for the outperformance is due largely to the “outside perspectives” brought into the boardroom by adding women to the board. Boards with a mix of genders, ethnicities, career experiences and ways of thinking are “less likely to succumb to groupthink or miss new threats to a company’s business model,” BlackRock CEO Larry Fink noted in his 2018 annual letter to CEOs.

Watershed moment for companies?

Investor campaigns designed to get companies to adopt socially progressive policies is not some “fringe movement,” David Katz, partner at Wachtell, Lipton, Rosen & Katz, a New York law firm that advises corporate clients on diversity-related issues and risks, wrote in the New York Law Journal. At the moment, he wrote, the theme of corporate equality is resonating in American culture and “it is on its ascendancy.”

Unlike in the past when activist investors had less clout, companies today can no longer ignore shareholder proposals without public backlash, Katz told D&I In Practice. It’s too risky and potentially harmful to their business for them not to engage with shareholders. “This has become self-perpetuating,” Katz says, debunking the notion that investor-driven D&I activism is a fad.

Data bolster the notion that pressure from investors to boost female representation is working. Since the introduction of “Fearless Girl” in 2017, more than 300 companies identified by State Street Global Advisors responded to the firm’s call by adding a female director, the firm said in September. In the U.S. alone, 215 companies added a female director. As a result, the percentage of companies without a female director in the Russell 3000 index, which tracks the entire U.S. stock market, fell to 16 percent by June 2018, down from 24 percent at the end of 2016, according to State Street.

Companies can’t be tone deaf to the new reality of shareholder activism, Katz says. For one, companies don’t want to get on the bad side of the biggest investors in the world who can vote with their money and sell their stock if they are displeased with the company’s lack of commitment to diversity. In addition, consumer-focused companies want to make sure they stay on their customers’ good side and remain competitive. Having or working towards a diverse employee base that reflects the community retailers sell into furthers that goal. And in the same way, no company “wants to have a #MeToo problem”; companies today don’t want to be perceived or branded as discriminatory. 

And while avoiding embarrassment plays a role in companies’ decisions to engage and accede to activist demands, there is another motivation driving increased corporate cooperation on diversity issues. “Companies don’t want to be viewed as laggards; they want to be viewed as leaders and don’t want to be called out on the issue,” Katz says.

So what’s the next frontier for D&I investor activists?

The focus of investor activists and big asset managers up to now has mainly been about bolstering the ranks of women and minorities in the boardroom. The next step in the fight for equality at work may have a more universal goal and focus more on everyday workers and middle-management positions.

“That is the next frontier, the next phase,” says Kosmas Papadopoulos, executive director at ISS Analytics. “The main investor focus has been on gender diversity on boards, but there may be more shareholder requests to assess how companies are encouraging gender parity across the entire workplace, including leadership roles and the C-Suite.” 

Going forward the issue of inclusion and diversity in the workplace will continue to be a key focus of investors, adds Baker of Trillium Asset Management. “There is momentum.” 

Indeed, nearly all investors now think corporate boards should have at least one female member. Last year, when asked if they thought it was a problem if there were zero female directors on a public company board, more than 80 percent of investors surveyed by ISS said they “considered it problematic,” up from 69 percent in 2017.

There’s no question that the investor message that diversity is good has been received by the companies, whether it’s adding more women to boards or opening up the job pipeline to all workers or creating a diversity training program, says Lukomnik. “Every headhunter I talk to says, ‘Companies tell me to bring them at least a pool of three candidates, but there better be a diversity candidate.’ They’re not being selected purely because of diversity criteria. They are good candidates that previously would have been overlooked.” 

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