by Cydney Posner
Happy International Women’s Day!
In this press release, State Street Global Advisors, which manages $2.47 trillion in assets, announced, on the eve of International Women’s Day, that it is “calling on the more than 3,500 companies [in which] State Street invests on behalf of clients, representing more than $30 trillion in market capitalization to take intentional steps to increase the number of women on their corporate boards.” According to State Street’s president and CEO, diversity is important to good governance: “A key contributor to effective independent board leadership is diversity of thought, which requires directors with different skills, backgrounds and expertise.” Although State Street’s preferred approach is to encourage change through active engagement, it may well use stronger measures, including voting against directors. According to the WSJ, State Street plans to “send letters about gender diversity this week to the heads of the more than 700 Russell 3000, FTSE 350 and S&P/ASX 300 companies with no women on their boards.”
The press release includes a photo of the statue of a young girl, as a symbol “of the need for action” and “the power of women in leadership” that State Street has placed right near the Wall Street bull. Some are calling the statue “fearless girl.”
In its press release, State Street observed that, although there has been some progress in board gender diversity, “one out of every four Russell 3000 companies do not have even one woman on their board, and nearly 60 percent have fewer than 15 percent of their boards comprising women directors.” According to an Equilar exclusive analysis completed in December for the WSJ, the boards of 76 U.S. public companies had no female directors throughout the past decade.
What accounts for this sluggish pace of change? In its Guidance, State Street observes that the “leading obstacles” to progress are “practices for nominating directors as well as behavioral biases that continue to undervalue the contributions of women in the workplace.” More specifically, these obstacles include:
- “Excessive reliance on existing director networks and connections that continue to be the primary source for identifying director candidates
- Requiring that all director nominees have CEO experience to be considered to serve on boards
- Lack of female representation in leadership positions on boards and in senior management to help guide the companies on their journey to diversify the organization
- Limited appreciation for and understanding of the value and need for greater gender diversity within organizations
- Lack of efforts to address behavioral gender biases inherent in workplace culture and HR-related practices within organizations
- Limited organizational support in helping individuals achieve work-life balance, which can stymie the career progression of women, thereby adversely affecting the pipeline of women leaders”
In its Guidance, State Street indicates that it prefers to “drive greater board diversity through an active dialogue and engagement with company and board leadership. In the event that companies fail to take action to increase the number of women on their boards, despite our best efforts to actively engage with them, we will use our proxy voting power to effect change — voting against the Chair of the board’s nominating and/or governance committee if necessary.” According to the WSJ, State Street won’t impose quotas, but will require that companies “prove they attempted to improve a lack of diversity. A firm that doesn’t add women, for example, would have to prove to State Street it attempted to cast a wider net and set diversity goals.” Companies would also need to “identify problems with their nominating procedures that may contribute to the dearth of female board members.” State Street plans to allow companies in the Russell 3000 “about a year to enact changes before voting against the reelection of heads of committees that nominate new board members.”
SideBar: Is this just empty talk? History suggests not. According to the WSJ, State Street may be more outspoken and proactive than some of its peers on corporate governance matters. For example, it has previously focused on board tenure issues. In 2015, State Street “voted against or withheld votes during the re-election of one or more board members at 380 companies globally because of tenure concerns. It estimates that 32% of those firms added at least one new director by 2016.” So perhaps State Street will indeed walk the walk.
To help boards enhance board gender diversity, State Street has developed a framework with six steps:
“1 Assess the current level of gender diversity on the board and within management ranks
2 Establish goals aimed at enhancing the level of gender diversity on the board and senior management
3 Identify ‘diversity champions’ on the board and within management who would support initiatives to meet established goals
4 Address behavioral gender bias in the director search and nomination process, including expanding the search for potential director candidates beyond existing director networks
5 Consider female directors for leadership positions and on key board committees
6 Enhance transparency and communication with investors on the board’s position on gender diversity and report on progress against established goals”
(Other approaches to enhancing board gender diversity are discussed in this PubCo post.)
But why is it important for companies to have women on boards? As Bloomberg has argued, while “[e]quality is a worthy goal on its own terms, of course….for the corporate world, the better rationale for gender diversity is financial…. Companies with at least one female director had better returns for six straight years.” A recent study from the Peterson Institute for International Economics showed that the presence of women in corporate leadership positions may improve firm performance and that “the magnitudes of the correlations are not small.” See this PubCo post.
In its press release, State Street cites an MSCI study showing that “companies with strong female leadership generated a return on equity of 10.1 percent per year versus 7.4 percent for those without a critical mass of women at the top, which is a 36.4 percent increase of average return on equity. And, according to a 2015 McKinsey Global Institute report, moving to a scenario where women participate in the economy identically to men would add up to $28 trillion, or an additional 26 percent, to annual global GDP by 2025 compared to a business as usual scenario.”
SideBar: In a 2014 speech, former SEC Chair Mary Jo White observed that there were many benefits, including financial benefits, when companies included more women on their boards:
“Increasingly, the evidence is that board diversity makes for stronger boards. Some research has highlighted key strengths that women bring to boards. For example, it has been found that women tend to better understand the perspectives of stakeholders, including consumers and employees. Another study shows that women tend to use cooperation, collaboration and consensus-building more frequently, and they are more likely to make consistently fair decisions considering competing interests.
“And, more broadly, there is increasing academic evidence indicating that bringing men and women together around the same conference table may enhance stock price and shareholder value. The Credit Suisse Research Institute, for example, reports that from 2005 to 2011 companies with women on the board had higher average returns on equity and higher net income growth. Another study published by Reuters found that globally, boards that include women tend to have better returns and to have less volatility compared to a benchmark index.
“Studies also show that the presence of at least three women directors changes boardroom dynamics and is associated with even greater positive impacts. For instance, one report found that between 2004 and 2008, Fortune 500 companies in the top quartile of average percentage of women directors outperformed companies in the bottom quartile by 26 percent based on the return on invested capital. Companies with three or more women board members outperformed companies with none by 60 percent. The powerful correlation drawn by these studies is one that boards should not overlook.” [citations omitted]
Similarly, Bloomberg agrees that “there’s a pile of research showing that boards and other leadership panels with 50 percent women think more critically, which may explain the better results. Group dynamics change for the better when both sexes are present. Diverse groups solve problems better than homogeneous ones do, possibly because the men and women monitor each other’s performance more closely.” See this PubCo post.