There are few headlines guaranteed to make my blood boil as much as the following: “Very few investors think about gender diversity” or “Wizz Air reshuffle fails to improve boardroom gender balance”. And no, these are not headlines from three decades or even three years ago – they appeared in the last few weeks. So I was pleased that, as Lord Davies made his final report into women on boards, his parting shot was aimed at investors, claiming they have been “asleep at the wheel” and urging them to use their power to take a zero-tolerance stance on inequality in the business world.
To be fair, some investors are doing just that. Last year, Aviva Investors declined to approve the reports or accounts of mining company Glencore because at the time the FTSE 100 company had no female representation on its board. Aviva’s critical stance was backed by other Glencore investors including Royal London Asset Management. And their views had an impact. Following combined political, media and shareholder pressure, Glencore did eventually appoint Patrice Merrin – lucky lady – as a non-exec director.
However, recent headlines suggest that the position taken by these investors is a long way from being the norm. Research by Hermes Investment Management, which the first of the above headlines refers to, revealed that just 23% of institutional investors believe female representation at board level to be important.
Hermes believes the reason for this is less about corporate sexism and more because the diversity argument is failing to resonate with many companies, with senior management tending to view diversity as a legislative chore or simply another compliance target to be met.
However, as Hermes’ research points out, the aim of boardroom diversity is not compliance box-ticking. It’s to avoid what the company describes as “the pernicious practice of group think”, which it claims are linked to corporate scandals including Enron, Barings Bank and the banking crisis.
Similarly, companies considering floating on the Stock Exchange aren’t sufficiently worried about boardroom gender diversity. Wizz Air, a FTSE 350 company criticised for not having a woman on its board, floated on the Stock Exchange earlier this year without female boardroom representation. So too did insurer Hastings and payment processing company Worldpay – this despite corporate governance guidelines advocating directors be selected from the widest possible pool of talent. I firmly believe the rules for joining the Stock Exchange should be changed to prevent new companies without a woman on the board from floating.
The bottom line is that investor insouciance around gender diversity is bad for business and risks damaging our economy. A recent report released by Grant Thornton revealed that the opportunity cost of male-only boards across three economies – the US, the UK and India – amounts to a mind-blowing $655bn, equating to £48bn for the UK alone. The report also revealed that moving to mixed boards in the FTSE 350 alone would boost UK GDP by 3%. As Grant Thornton pointed out, imagine the impact on GDP if companies outside the FTSE embraced boardroom gender diversity as well.
Investor apathy about boardroom gender diversity also increases the prospect of mandatory quotas being introduced. While I am a big fan of Lord Davies, I disagree with his claim that quotas are dead. The UK remains the only major EU economy without mandatory quotas and the issue is very much alive and kicking for the European Commission. Its 2012 gender balance on boards directive, which is currently under consideration, aims to raise the proportion of female non-exec directors of EU publicly listed companies to 40% by 2020.
Although a number of countries including the UK oppose the measure, opposition to the directive may disintegrate if more countries adopt mandatory quotas unilaterally. Even if the directive is defeated, calls for mandatory quotas here in the UK happen almost monthly. North of the border, the Scotland Bill is about to give the SNP government the power to set gender quotas on public boards.
In my view, Lord Davies announcing the demise of mandatory diversity quotas is not only premature, it’s potentially unhelpful. Yes, the UK has achieved 25% female boardroom representation among FTSE 100 companies but as Davies himself acknowledges, we still have a long way to go. While I’m against mandatory quotas, as Jo Swinson – my fellow panellist on the recent Institute for Government quotas debate – pointed out, the threat of quotas is still useful for bringing the laggards to heel. If this danger has disappeared, where is the incentive for change?
The threat of quotas aside, I believe there is real political and media pressure driving the issue of boardroom diversity. FTSE companies with non-diverse boards are being named and shamed in the press. It’s high time that investors viewed boardroom diversity as a non-negotiable business and ethical issue, not just as compliance box-checking. This means being prepared to hold the companies they invest in publicly to account.
As we have seen with Glencore, some already are. And, in another positive move, Aviva Investors, Old Mutual Global Investors, Legal and General Investment Management and Hermes Equity Ownership are all on record as saying they are likely to reject proposals from all male boards of FTSE 250 companies.
To encourage others to follow suit, it would be great to see a list of all the institutional investors demanding best practice on boardroom diversity, along with a similar one showing those doing nothing. I for one believe that public opinion will be a much more effective catalyst for change than mandatory quotas.