& Securities

One of the defining images of International Women’s Day may have been a statue of a young girl, standing unafraid and staring confidently in the face of Wall Street’s iconic charging bull. Installed by State Street Global Advisors as “a symbol of the power of women in leadership,” it also marks the launch of a campaign that aims beyond symbolism. Last week, State Street, the world’s third-largest money manager with almost $2.5 trillion in assets, announced that it will actively engage with companies to add women to their boards, and is prepared to vote against nominating committee chairs of boards that fail to do so. And earlier this week, BlackRock, the world’s largest asset manager with $5.1 trillion under management, announced a similar initiative to improve gender diversity in the boardroom.

As part of its review of board gender diversity, State Street analyzed the level of diversity in three key markets – the US, the UK and Australia. State Street noted that, although there has been some progress made, still 24% of S&P 500 companies, 11% of FTSE 100 companies and 16% of ASX 100 companies do not meet the threshold of at least 15% of women on boards. Furthermore, State Street noted that almost 60% of Russel 3000 companies have fewer than 15% of board seats filled by women.

While neither State Street nor BlackRock is advocating for a fixed gender quota, each has indicated that it will take a firm stand against boards that do not make progress.

State Street previously launched a gender diversity exchange-traded fund (or ETF) in March 2016 (ticker “SHE”), comprised of companies at which women are well-represented on the board and in senior management. State Street said it intends to begin its new campaign by sending letters to the Russell 3000, FTSE 350 and S&P/ASX 300 companies with no women on their boards. While more vocally “political” positions are common within the ESG investing sector, the asset manager’s newly issued Guidance on Enhancing Gender Diversity on Boards brings these concerns into the mainstream and ties gender diversity specifically to the goal of “ensuring effective independent board leadership,” which it sees as “fundamental to good governance and positive investment outcomes.” The guidance identifies “current practices…and behavioral biases that continue to undervalue the contributions of women in the workplace,” and also highlights the importance of gender diversity at the senior management level. The guidance also contains a six-step framework of actions to help boards enhance their gender diversity.

In a similar vein, BlackRock’s “engagement priorities” for 2017-2018 include a specific focus on increased gender diversity in the boardroom. Under this initiative, BlackRock will engage with companies over the coming year to “better understand their progress on improving gender balance in the boardroom.”  BlackRock noted that “[d]iverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions.” BlackRock said that it will hold nominating and/or governance committees accountable if a company does not make progress in diversity initiatives “within a reasonable time frame.” BlackRock also indicated that it would “encourage governance structures that enhance accountability (e.g., proxy access), limit entrenchment (e.g., annual election of directors and board evaluations), and align voting rights and economic interests (i.e., one share, one vote).”

Apart from gender diversity, BlackRock also indicated that it expects boards to have “demonstrable fluency” in areas of key risks that affect the company’s business (e.g., climate risk) and management’s approach to addressing and mitigating those risks.  BlackRock said that it will assess this through corporate disclosures and direct engagement with independent directors “if necessary” and (seemingly eyeing lead directors and key committee chairs) that it “may signal . . . concern through our vote, most likely by voting against the re-election of certain directors we deem most responsible for board process and risk oversight.”

Neither State Street nor BlackRock has released its 2017 proxy voting guidelines, which may give a clearer indication of how their respective campaigns will be implemented. For example, it is possible that their votes on shareholder resolutions regarding board diversity will become more aligned with ISS recommendations. ISS generally supports such proposals, taking into account whether the board is already reasonably inclusive or has adopted and reported on initiatives to improve diversity, and whether the proposal is overly prescriptive or binding.

It remains to be seen whether State Street and BlackRock will stand out among their peers on boardroom diversity or whether other large asset managers, particularly those who have signed on to the Investor Stewardship Group’s Framework for U.S. Stewardship and Governance, will follow suit and commit to applying their voting power in a more targeted way than before to encourage companies to improve their board gender diversity profiles.