Institutions boost calls for diversity to increase board effectiveness

The LAPFF announced last week that it supported diversity initiatives adopted by Legal & General Investment Management in October last year to vote against board or chair nominations if they had failed to set diversity targets, appoint women to the board or adequately disclose their gender balance.

“There are moves to improve diversity, particularly in listed boards. You can see that the moves by LAPFF are not being made in isolation,” said a spokesperson for the forum.

Diversity is becoming a greater focus for investors, with proponents of shareholder activism arguing it can make boards more adaptable
and more representative of their companies.

Clare Payn, international corporate governance manager for LGIM, said: “[With a diverse board] the company will be better able to recognise opportunities and respond to them.

“It’s about board effectiveness. The board is the DNA of the company so that has to be right.”

Diversity initiatives are typically centred on gender diversity, but investors are gradually changing their approach to include other factors such as nationality
and skillset.

Investors are increasingly looking to ensure that boards include a diverse range of these backgrounds to reflect the different aspects of the company, Payn said, adding: “The gender question has been very high on the agenda, skillset and nationality have grown in importance. Many companies get revenue outside the UK so that should be reflected.”

Companies may also benefit from bringing members onto their board who are not directly related to their sector, but could still have useful input.

“Technology [expertise] would be important for banks and retailers,” said Leon Kahmi, executive director at Hermes Equity Ownership Services. “Also, diversity of functions [is important], say, investment banking expertise for acquisitive companies.”

Investors looking to use engagement to bring about diversity in companies should consider what objectives they have for the company in question before voting, said Kahmi. “We look at what the company is trying to achieve before we look at the board,” he said.

Engagement can be a useful tool for investors looking to foster diversity, added Payn. “Companies recognise that this is something we’ll want to talk about. Voting is our power at the end of the day,” she said.