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.
While there are many ways diversity can be achieved, some ideas to build on include:
Both companies publishing information and engaging directly with companies to get an understanding of their approach to diversity is essential to the process to understand true diversity. Some questions that can be considered are: “How do directors define board diversity,” “How does the board apply diversity considerations to its search for new directors?” “Has the board faced any challenges when seeking to increase board diversity?”
Companies can strive to be a leader in diversity and advocate for all companies to make changes to incorporate a diverse boardroom. Increasing board diversity is an ongoing process, a process that companies need to focus their efforts on and continue to evolve. With greater diversity, the possibility for differing perspectives that can benefit the company and associated shareholders broadens.