Can a lack of diversity cost you a board position?

Boards face tougher scrutiny at AGM season these days. Many current and potential directors are denied future board positions because enough of the voting franchise has rallied against them. 

Shell and Proctor & Gamble have struggled with it over environmental concerns. BlackRock has engaged in it over governance worries. 

The reasons are numerous. However, these days, ESG principles are the driving force behind voting down a candidate. 

When a company’s management proposes a board candidate and subsequently receives votes against this at election time, the most commonly-cited reason is a lack of board diversity. 

That’s according to the latest Harvard Forum on Corporate Governance data, which analysed uncontested director elections at Russell 3000 index (the 3000 largest publicly held US companies) from 2013 to 2021. 

“We find directors at firms with less board diversity receive less support from shareholders,” the research paper said. 

“In particular, members of the nominating committee are held responsible for lack of diversity, and they receive even fewer votes.”

Yes. 

• Institutional investors are at the heart of efforts to vote against particular directors. 
• Investors occasionally and purposefully use their voting power to bring about change. 
• These investors increasingly publish a rationale for their decisions at election time, and these published rationales generally incite further votes against directors. 
• Female directors receive comparatively more support than similarly qualified male directors – a change from previous data. 
• The trend of voting in the name of diversity coincides with an increased average female representation; around 25% of boards in the index are now women.

Depending on the industry you work in, this might come as a surprise, or it might not. But it’s important because it showcases how investor preferences drive some of America’s most prominent businesses. 

Increasingly, institutional investors have more confidence in using their voice and vote to push against company decisions, especially if those decisions come from management. 

It’s also important because of the decisions’ attachment to ESG pillars. ESG has become an extremely contentious issue in the US, but beneath the political rhetoric, its principles are still being felt on the ground and probably will be going forward. 

So far, though, most of the newsworthy shareholder dissent has centred on climate issues, as in the examples listed at the top of this article – the “E” in ESG takes prominence. However, this data suggests that the “S” is also getting some of the limelight at election time.

The research paper concludes that institutional investors use their votes “effectively” to push for specific ESG-related changes. 

This may be so, but the reality is that there is usually much debate among investors and management when these situations arise. 

Most of the time, all can agree on the long-term goals. It’s just the method of getting there that causes friction. 

Ultimately, these investors are using their votes “effectively” if their dissenting voices against directors make a difference that they’re happy with.