By Jessica DeRosa, Baker Tilly
Fund managers are focusing on the diversity of their boardrooms and their impact on investment strategies. Boardroom diversity relates to gender, ethnicity and socioeconomic upbringing in the boardroom. John Galloway, principal and investment stewardship officer at Vanguard, authored an article focusing on this. The premise, based in Vanguard’s beliefs, is that diverse groups are better equipped to make decisions leading to improved long-term results for shareholders.
Vanguard has been advocating for diversity on boards over the years. Vanguard’s efforts began in 2017 with a focus on gender diversity. They have continually evolved their learning and, in 2019, expanded efforts to ensure race, ethnicity, national origin and age were represented in their diversity training. Through Vanguard’s leadership, they have encouraged other boards to publish perspectives on diversity and to find more diverse candidates for open director seats.
Boardroom diversity will continue to be a focus of Vanguard’s as they believe boards lacking diversity will hamper shareholder returns. Beginning at their 2021 annual meetings, the Vanguard funds may vote against directors at companies where progress on board diversity falls behind market norms and expectations.
Vanguard’s expectations for boards to achieve greater diversity include creating board diversity efforts, making progress and show outcomes. They want companies to disclose diversity measures and the diversity makeup of the board. Vanguard expects boards to become increasingly diverse which will better reflect the employee and customer composition of the companies they help lead.
Ways to achieve board diversity
While there are many ways diversity can be achieved, some ideas to build on include:
- Long-term planning – The progress on diversity requires both near-term action and long-term commitment. Boards can seek directors to recruit based on changes in the company’s strategies and relevant upcoming risks, rather than waiting for the director to resign or retire. Board recruitment can go hand in hand with other company changes and boards can actively be building a potential candidate pool. Prior relationship building and advance planning could accelerate the director search process and minimize boardroom disruption when a board seat opens.
- Broad searches – New director candidates can be recruited based on experience and personal characteristics. Seeking executives who lead different sectors could bring more deep and valuable subject matter expertise to boards than the usual CEO candidates.
- Strategic increases to board size – Boards can readjust their size, as appropriate, to accommodate more diversity.
- Board cultures that foster difference and debate – Boardroom diversity can be ongoing and not stop once the diverse directors have been identified. The executive management team can drive an inclusive onboarding process, invite new director participation, and encourage differences of opinion.