It’s tough sitting on the Board of a public company. But Board Directors are learning the lessons of being in the public eye. And there is evidence that when scrutiny has been applied on issues such as diversity and executive pay, Board Directors have responded. But can the same be said for those tasked with policing the Boardroom? Drawing upon our Board Search and Advisory experience, Fidelio asks whether other key players in the governance puzzle, including shareholders, are carrying their weight in governance reform. Are the asset owners embracing the diversity of thought and experience that they demand from the Boards of the companies they invest in?
Setting The Rules
Directors of public companies are subject to legal and regulatory frameworks. They are also required to observe corporate governance codes. Politicians quite reasonably argue that companies belong to shareholders and therefore the shareholders/owners should be the arbiters of important decisions such as who sits on the Board and what level of pay is appropriate for the CEO.
But politicians also recognise that diversity and inclusion are important societal goals and that growing inequality is a political, social and economic risk. Therefore politicians do not leave shareholders a free hand. Rather they provide guidelines or even quotas for major public companies on diversity and remuneration and then turn to the shareholders to ensure that companies are making progress on increasing diversity and adopting “fair” remuneration policies.
So far so good. There is surely agreement that a more inclusive society and a reduction in inequality are worthy goals. Most of us would also agree that public companies have an accountability both to shareholders and to stakeholders. And there is certainly evidence that public companies, particularly those in the public eye, are increasingly determined to behave like good corporate citizens.
The only way change comes is when you lead by example
Anne Wojcicki, Chief Executive Officer, 23andMe
Take diversity for example. While there remains a way to go, in most major markets formal or informal goals are in place to achieve more diverse Boards and leadership teams. And in some countries substantial progress has been made. Major UK Boards now stand at ca. 27% female participation; Norwegian and French Boards at over 40%; and Icelandic Boards closer to 45%.
Much more remains to be done with regard to broader diversity targets but the Parker Review in the UK sets targets for greater ethnic diversity in UK Boardrooms by 2021. Ethnic diversity in US corporates has long been a priority, particularly at Executive level. And in both the UK and the US there is a strong movement towards ensuring that the LGBT voice is heard and represented at Board and Executive level.
Equally on the thorny topic of remuneration, a recent analysis on 2017 AGM votes by institutional investors in the UK conducted by the Investment Association highlighted that major UK companies are becoming better at engaging earlier with investors and heading off confrontation. Recent research by Deloitte also found that 9 in 10 FTSE100 companies had more than 80% support on remunerations proposals. The focus is now shifting to smaller companies in the FTSE universe; here investors think that the relationship between performance and remuneration frequently needs to be improved.
Who Wants to Serve On A Public Board?
There is still a powerful voice arguing that the level of regulation and intrusion faced by quoted companies is contributing to the decline in public markets. Fidelio frequently hears from clients and leading quoted companies that it is difficult to attract top talent into quoted companies when the compensation is so much more attractive in privately held companies and the privacy much greater. We agree that the playing field is not even but continue to argue:
- The status and influence of leading a major quoted company at Board or Executive level quite rightly remain an important attraction. Indeed the role of the public company Director is one that we explore on Fidelio’s “A Seat at the Table“ Programme for the pipeline of tomorrow’s female Chairs and CEOs.
- Access to the public markets creates a number of strategic opportunities not available to privately held companies. Fidelio supports companies regularly through the IPO process by building Boards and leadership teams with experience in the public markets.
- Public markets play an important role for government and pension funds, for example. Their functioning should quite rightly be subject to constant review but the necessity of their existence remains.
The gender pay gap reporting requirements present a challenge for a number of sectors including engineering, technology and Financial Services. On the whole however we find leading companies, including our clients, facing this head on, preparing the data and, critically, the narrative to explain how the company intends to move from its current position to narrowing the pay gap.
As a general statement, we find public companies accepting – perhaps grudgingly – of the responsibilities that come with being in the public eye, including being accountable to both stakeholders and shareholders. Sometimes admittedly progress is slow. Consider for example the recent disclosure that 75% of MDAX companies in Germany have taken the option of setting gender diversity targets at the current level (i.e. a target of 0% increase in diversity) – thereby accepting the status quo in terms of gender diversity at Board and leadership level.
But the trend is ineluctable. Public Boards must be accountable to shareholders and also respectful of public expectations.
Shareholders And Governance
There are influential voices within the institutional investment community that are recognising the importance of good governance and corporate behaviour and are increasingly behaving like stewards of the businesses they invest in. These include:
- Major pension funds such as the California Public Employees’ Retirement System (CalPERS), a $300 billion fund.
- Sovereign wealth funds (SWFs) such as Norges, the Norwegian SWF with $903 billion under management.
- Environmental, Social and Governance (ESG) increasingly an asset class in its own right – with players such as Hermes Equity Ownership Services (EOS), the stewardship consultancy, vocal in insisting on good governance on behalf of clients, frequently pension funds.
- Investors with large index holdings, such as Legal and General Investment Management (LGIM) which must hold stocks as part of the index and are obliged to care deeply about governance. Sacha Sadan, Director of Corporate Governance, LGIM, and other Heads of Corporate Governance at peer organisations, are now an influential governance voice for the FTSE.
The Investor Forum in the UK has also been created tofacilitate dialogue between corporates and investors and to help Directors to engage better. We have seen similar developments in the US – Rakhi Kumar, the Head of Governance at State Street (with $2.6 tln AUM), has recently given a series of interviews on driving diversity and responsible leadership.
Despite all this, asset managers themselves do not seem to be at the forefront of good governance and great leadership.
It is certainly an industry that is under tremendous pressure for example from technology – think of the wild success of Exchange-Traded Funds; and regulation – think here of the major disruption posed by the roll out of the EU post-Financial Crisis regulation the “Markets in Financial Instruments Directive” (MiFID II) across Europe. Cost cutting and disruption are absolutely on the Board agenda for asset managers. But is that not also the case for the companies that they invest in?
Practising What You Preach
Gender diversity in the asset management industry is a cause for concern. Five years ago, fresh from the Financial Crisis, we had a number of inspiring female leaders in asset management driving gender diversity forward both in the industry and the companies they invested in. With a few high profile departures from leadership roles, it seems that there are now substantially fewer women at the top of this sector; and worryingly asset management is apparently also becoming less attractive to young women entering the workforce.
Citywire’s Alpha Female 2017 Report covered 15,000 fund managers globally and found just 1 in 10 fund managers were female and that the average fund run by women is less than two-thirds the size of the average fund run by men.
In 2016, major fund houses agreed to share data on how many women the world’s largest asset manager employs at a senior level, reflecting the challenge of gender equality for the industry.
A very good initiative, the Diversity Project, was also launched late 2016, supported by most of the major companies in the UK investment management industry, as well as high-profile individuals such as Helena Morrissey, Chair, LGIM, and Andy Haldane, Chief Economist and the Executive Director of Monetary Analysis and Statistics at the Bank of England. We look forward to hearing more about progress made.
Our ability to perform well depends upon the talent we are able to attract and develop […] by drawing upon a blend of analytical, innovative and empathetic skills […] broadening the talent pool in terms of socio-economic background, degree discipline, ethnicity, disability, age, sexual orientation and of course, gender.
Helena Morrissey, Chair, Investment Association
It feels as though the most exciting developments in the asset management industry are no longer mainstream active management but increasingly technology driven or bold activism. And if we look to the hedge fund industry it turns out to be predominantly male in terms of the investment managers and business owners.
The Diverse Asset Management Project Firm Assessment, published earlier this year, reported that female run hedge funds in the US control less than 1% of total industry assets and male portfolio managers outnumber women by 20 to 1. Indeed, if we look to activism, it is a struggle to think of a female activist.
The Risks Of Narrow Ownership
There is much concern about the risks of too narrow a universe of thought in Silicon Valley, and the consequences of excluding female perspective from coding. We should be equally concerned that the investors influencing substantial amounts of stock market activity, are potentially drawing upon a very similar universe of intellectual horsepower which is subject to a worrying lack of diversity.
Shareholders and asset owners exert enormous influence and have an integral role to play with regard to governance. Is it unreasonable to expected asset managers to lead by example?
Professor Bob Garratt of Cass Business School has argued strongly in his recent published work “Stop the Rot: Reframing Corporate Governance” that effective governance cannot rest only on the shoulders of corporate Board Directors. A healthy, learning system of governance must extend to government, the regulator and, critically, the asset owners. Fidelio very much endorses applying these higher standards of professionalism and the duty of care to all key players in corporate governance.
In our capacity as a Board Development and Executive Search consultancy, Fidelio has been heartened to see corporate Boards make progress on tough issues including diversity and remuneration. One of the sectors that has saddened us recently is the asset management industry. Those that police the Boardroom do well to lead by example.