When you think about the role of a stock exchange, championing diversity and inclusion (D&I) may not be the first thing that comes to mind. However, moves made by Nasdaq in the US have been welcomed as it is hoped this will be the nudge the corporate market needs to accelerate the pace of change in terms of gender diversity.
At the end of last year, Nasdaq proposed a rule that would require companies listed on the exchange to include on their board of directors one woman and one member of an ‘underrepresented’ ethnic minority or LGBTQ+ group. Smaller companies and foreign companies on the exchange could comply with two female directors. Meanwhile, in the UK, the Financial Conduct Authority has now also said it will consider whether to introduce diversity requirements for public companies.
“It is an interesting development,” according to Clare Payn (pictured), senior global ESG and diversity manager at Legal & General Investment Management (LGIM). She says asset managers and investors have played a part in pushing diversity higher up the agenda by using their shareholder votes to encourage boards to appoint more diverse directors, but the pace of change has been frustratingly slow.
“The Nasdaq announcement has come from a groundswell in opinion. It is a key issue for the industry, and it will cause companies to move quicker in terms of diversity on boards,” she adds.
Shifting attitudes
Although the rule is subject to approval from the Securities and Exchange Commission, the investment professionals Portfolio Adviser sister title ESG Clarity spoke to say the proposal is positive and marks a shift in corporate attitudes. Management are finally “seeing that D&I in governance and oversight will improve a business’s success in the long term”, according to Lisa Harlow, Vanguard’s head of investment stewardship.
Payn notes index investors, such as LGIM and Vanguard, have a huge responsibility to push areas of concern on behalf of clients.
“We know companies will miss out on being sustainable over the long term if they are not diverse,” she says. “They will lack innovation, have growth problems and be higher-risk. Diversity is proven to have financial benefits. We don’t need to keep debating the ‘whys’, we need to move on to the ‘hows’.”
Tick-box approach?
However, while Nasdaq’s proposed rule has largely been welcomed, investors say it does not go far enough to address the lack of diversity in the wider workforce.
Chris Mellor, head of EMEA ETF equity and commodity product management at Invesco, says: “There are many requirements to meet when you list a company, and a number of these are around governance. Ensuring diversity on boards is a relatively modest step.”
He believes although this shows “the direction of travel for the industry”, it still will not have a “massive impact”. Meanwhile, Vanguard’s Harlow adds while it was pleasing to see Nasdaq taking leadership in moving things forward across the listed sector, she would prefer a more joined-up approach in the US.
“We like the UK approach where the whole of market is involved, policymakers, investors, industry bodies, regulators and other stakeholders. They are all trying to move diversity forward.”
She also echoes concerns that establishing a quota system does not lead to overall change and inclusion. “Companies tend to comply [with the quota system] but is this creating real change in culture or is it simply a tick-box approach to comply with the quota?”
Catalyst for change
LGIM’s Payn agrees there is much more work to be done and says a lot of this falls on the shoulders of asset managers, particularly those with trillions of assets under management in index mandates.
“Is it enough? Arguably not. But it does mean it will pick up the pace as the stock exchange is saying this is the key to the future success of your company. Being an index manager is beneficial as we can push the whole market rather than engaging with companies one by one,” says Payn.
For example, LGIM has committed to voting against boards made up of less than 30% women in the UK and US. Last year, LGIM announced it wanted all FTSE 100 boards to include at least one black, Asian or other ethnic minority member by January 2022, and if companies fail to meet that target, the firm will vote against the re-election of its chairperson or head of its nomination committee.
A move towards gender parity would be the ideal, so that if a woman steps down from the board, gender diversity does not drop to zero, as is often the case at present.
According to Payn, Nasdaq’s announcement may be the catalyst for a pick-up in the pace of change.
“We know it only takes one company to step forward and be brave, and, as investors have welcomed this, we could see other exchanges following suit. Investors are very influential and it will urge companies to think about this as a central part of their strategy, not just as an add-on”.
This article is taken from the March 2021 issue Portfolio Adviser sister title ESG Clarity
