Focus on board diversity

 There have been two recent publications which highlight the importance of board diversity for traded companies. Institutional Shareholder Services (ISS), one of the leading proxy advisory firms, have published their 2021 benchmark policy consultation, seeking views on their proposed new and amended voting policies for 2021. This includes revised proposals on board gender diversity. Meanwhile, the Investment Association (IA) issued a press release on ethnic diversity on boards, noting that investors are calling for greater transparency in this area.

ISS 2021 benchmark policy consultation

ISS has recently announced a number of proposed voting policy changes for 2021. For the UK and Ireland, the proposed changes include:

• For companies that are part of the FTSE 350 (excluding investment trusts), ISS will generally recommend against the chair of the nomination committee (or other directors on a case-by-case basis) if the board does not comprise at least 33 percent representation of women, in line with the recommendation of the Hampton-Alexander Review on improving gender balance in FTSE leadership.
• ISS will generally recommend against the chair of the nomination committee (or other directors on a case-by-case basis) where there is not at least one woman on the board and the company is:
  • a constituent of the FTSE SmallCap index;
  • a constituent of the ISEQ 20 index of companies that trade on the Euronext Dublin; or
  • quoted on the AIM market of the London Stock Exchange with a market capitalisation of over £500 million.

Existing mitigating factors, such as compliance with the relevant board diversity standard at the preceding AGM and a firm commitment, publicly available, to comply with the relevant standard within a year, will continue to be considered. In 2021 only, for FTSE 350 companies a public commitment to bring the composition of the board in line with the recommendations of the Hampton-Alexander Review by the following AGM will not result in a negative recommendation, regardless of the previous composition of the board.

It is also worth noting that the other key change in the ISS voting policy changes for 2021 for UK companies to be aware of relates to director accountability. ISS proposes to specify that significant risk oversight failures regarding, among other matters, environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members. This change is intended to ensure that ISS has the flexibility to find that directors have failed in their risk oversight role if they have neglected to take meaningful steps to increase the resilience of companies to climate-related risks.

Next steps

Comments on the proposals should be received by 26 October 2020. ISS expects to announce its final 2021 benchmark policy changes during the first half of November 2020 and apply the revised policies to shareholder meetings on or after 1 February 2021.

Investment Association press release: Investors call for greater transparency on ethnic diversity on boards

The focus on board diversity is also highlighted by a recent press release from the Investment Association (IA). The press release notes that investors are calling for greater transparency on ethnic diversity on company boards. The IA notes that according to its data, almost three-quarters of FTSE 100 companies failed to report the ethnic make-up of their boards in the 2020 AGM season. The Parker Review report published in October 2017 recommended that by 2021, there should be at least one non-white director on the boards of FTSE 100 companies. However, the IA notes that a lack of transparency means that investors cannot hold companies to account in their progress towards this target.

In contrast, however, the IA notes that FTSE-listed companies have made good progress on increasing the number of women on their boards with the FTSE 350 now meeting the 33% gender diversity target set by the Hampton-Alexander Review in aggregate.

Comment

Board diversity continues to be topical and should be on the radar of boards of companies of all sizes. Compliance with the recommendations of the Hampton-Alexander review for larger companies marks a toughening of the ISS policy on gender diversity, which is currently to vote against election of the chair of the nomination committee where there are no female directors on the board. For smaller companies, ISS believes that the proposed policy change  "acknowledges developments in market practice and expands minimum board diversity expectations to a significant proportion of the companies covered by ISS within the UK and Ireland."

Useful Links

Proposed ISS Benchmark Policy Changes for 2021

Investors call for greater transparency on ethnic diversity on boards