Issue Brief: Board Diversity
At the helm of the corporate ship, a company’s board of directors is charged with steering the firm’s corporate policies and practices—and ensuring they are in the best interest of shareholders, employees, and other stakeholders. One of the board’s top priorities is to provide independent oversight of corporate management. This includes hiring and firing the CEO, as well as establishing executive compensation plans that promote the company’s long-term success. Overall, the board is responsible for the long-term stewardship of the company, which means it must understand all the material threats and opportunities the company is facing—including its environmental, social, and governance (ESG) risks.
All of these duties significantly impact the financial health and long-term profitability of an organization—and all of them benefit from an active, independent board drawing from an array of diverse viewpoints and experiences. With this in mind, Calvert looks at several key indicators to evaluate the effectiveness of a company’s board of directors and its relationship to management:
- Board Diversity Calvert strongly believes women and minorities should be represented at the highest levels of the company. In an increasingly complex global marketplace, board diversity—inclusive of race, gender, culture, age, and geography—provides a wide range of viewpoints, skills, backgrounds, and experience for the firm to draw from. This diversity enhances the company’s strategic decision-making, competitiveness, and public image. It also helps the company understand and respond more effectively to shifting consumer demographics and catalyzes efforts to recruit, retain, and promote the best people, including women and minorities.
- Board Member Independence A company’s board as a whole should be comprised of a strong majority of truly independent directors, free of any ties or conflicts of interest with the firm. Board members cannot effectively represent shareholders’ interests if they are not willing to challenge management and ask the tough questions. Objectivity is critical—and hard to achieve when directors have a material financial or personal relationship with the company or any of its managers. Key corporate committees, such as audit, compensation, nominating and/or governance, should be exclusively comprised of independent directors as well.
- Independence of Board Chairperson Independence of the board’s chairperson from the company’s chief executive officer (CEO) is a governance concern and Calvert prefers to see these positions separated. When the company’s CEO serves as the board’s chair, it creates an environment where the CEO can potentially wield too much influence over the board. This may diminish the board’s ability to provide effective oversight of his or her management—and to be accountable to shareholders.
- Oversight of ESG Policies In recent years, many observers have been asking what role boards of directors should play in managing ESG risks, which are increasingly viewed as having implications for capital investments, corporate strategy, and organizational brand and reputation. Calvert’s view is that board level oversight of ESG factors can help establish a strong, responsible corporate culture, enhancing corporate disclosure practices and performance. It also sends a clear signal to stakeholders that a company is assessing and managing its so-called “extra-financial issues.”
- Oversight of Executive Compensation Since the financial crisis of 2008, reports of hefty compensation and severance packages for executives of companies that have suffered losses, foreclosed on homeowners, or laid off employees have sparked a public outcry. And rightly so, as it simply defies common sense for boards to award soaring executive pay packages when a company’s stock price—and shareholders’ investment—is declining. In Calvert’s view, it is not ethical to provide excessive compensation when employees and communities have been so hard hit by the financial crisis. Calvert believes an important element of strong corporate governance [link to issue brief] is to make executive compensation more transparent and better aligned with the risks and rewards for employees, shareholders, and the long-term performance of the corporation. It is also crucial to ensure compensation plans do not incentivize executives to manage for short-term performance at the expense of long-term profitability, which can compromise good governance, as we saw in numerous corporate accounting scandals over the past decade.
Gender Diversity—Critical to Long-Term Success
For years, Calvert has regarded gender diversity as a critical governance goal, recognizing the financial, intellectual, and political clout of women—and their gross underrepresentation in the upper echelons of corporate America and in the boardroom. That’s also why, in 2004, we partnered with the United Nations Development Fund for Women (UNIFEM) to launch the Calvert Women’s Principles®, the first global code of corporate conduct focused exclusively on empowering, advancing, and investing in women worldwide. These Principles are the basis for our research, advocacy, and policy work related to gender equality. They have also become the basis of both the San Francisco Gender Equity Principles and the UN Women’s Empowerment Principles which have generated action by dozens of companies in the San Francisco Bay Area and hundreds of companies around the world, respectively.
Mounting evidence underscores the business case for diversity at the very top. Research from McKinsey & Company found that companies with the highest share of women on executive committees outperformed those with all-male executive committees, earning a 41% higher return on equity and 56% better operating results.1
Yet, qualified women continue to be overlooked, as the same limited pool of candidates is scoured again and again for these high-powered positions. While progress has been made, today women still hold just 18% of corporate board posts, but comprise nearly 50% of the workforce.2
Calvert’s goal is to effect a shift toward corporate boardrooms that are more inclusive and reflective of a company’s employees, consumers, and shareholders—not for companies to appoint a “token” woman. To that end, we have made an ongoing commitment to conduct research on gender equality in corporate America, publish our survey findings, and drive change through shareholder advocacy.
The Evolution of Board Reforms
Measures required by the Sarbanes-Oxley Act in 2002 set today’s standards for U.S. public company boards, management, and public accounting firms in an effort to restore public confidence in corporate governance. A number of policies enacted since then have continued to raise the bar on shareholder rights and corporate disclosures. For example, in December 2009, the Securities and Exchange Commission (SEC) provided a number of new requirements aimed at enhancing disclosures in corporate proxies to allow shareholders to make more informed voting decisions. One of the requirements was focused on how companies consider diversity in its search for board directors.
More recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2011, covered issues such as executive compensation, golden parachutes, shareholder “say on pay,” and the implementation of “claw-back” policies, where executives convicted of fraud may have to return a portion of their compensation. Calvert worked hard with other stakeholders to ensure inclusion of certain provisions and support passage of the Act. Little by little, all of these regulations have created stronger boards and greater accountability which serve to better protect investors’ interests.
For many years, Calvert has been leading the charge for board reform, leveraging shareholder resolutions, research studies, and multi-stakeholder initiatives to urge companies to enhance the oversight, accountability, and effectiveness of corporate boards. We’re pleased to see that companies are increasingly recognizing the importance of strong, diverse boards in creating long-term value for the company and its shareholders—and we will continue our focused work in this area.
1. McKinsey & Co., Women Matter 3, September 2009.
2.Calvert, Examining the Cracks in the Ceiling: A Survey of Corporate Diversity Practices of the S&P 100, October 2010.
SRI criteria will vary from fund to fund. Please see a fund's prospectus for details.