Action needed despite third of new S&P 500 board appointments being women

Gender diversification on boards was a prominent issue last year, and shareholders have never been more explicit in their expectations of companies, writes Aniel Mahabier

Gender diversification on boards was a prominent issue in 2018 and shareholders had never been more explicit in their expectations of companies.

A CGLytics report on diversity in the boardrooms of S&P 500 companies reveals that some progress has been made on an issue that was very prominent in 2018. Companies have improved female board representation – but at a much slower rate than is needed to meet targets set by some proxy advisers and new legislation.

In the past 12 months, the emphasis on gender diversity in the boardroom has never been greater. Demands from not only the media but also shareholders, investors, proxy advisers and governing bodies, as well as campaigns such as the Fearless Girl, have made all companies, regardless of industry, sit up and take notice.

There are, of course, many benefits to improving boardroom gender diversity that go far beyond fresh perspectives and improved profitability. But in order to build an effective board that meets current diversity standards, nomination and governance committees need to find new ways to recruit the right – and best – female candidates to fill their board.

Appointments and departures of S&P 500 company directors between 2017 and 2018 are evidence that companies are actively trying to improve gender diversity on boards. While overall female representation grew by only 1 percentage point, there are some data points that demonstrate how S&P 500 companies are progressing.

1. One third of new board appointments in 2018 were women 

One of the most encouraging changes in 2018 was the increase in the percentage of female appointments to boards. Thirty-three percent of new appointments were female, up from 25 percent from the previous year. Of the 60 new appointments under the age of 50, more than half were women, demonstrating that companies are recruiting younger female leaders. In tandem with gender, diversity of age should also not be overlooked as our findings reveal a positive correlation between the number of younger directors on S&P 500 boards and one-year company total shareholder return

2. Telecommunications services have the highest representation of women on boards

Almost all industries saw an improvement in gender diversity of their boards between 2017 and 2018. The financial sector showed the greatest improvement, with female appointments up by 2 percentage points. While telecommunication services saw a 3 percentage-point fall in female representation in 2018, the industry still shows the largest representation of women on boards, at 28 percent.

One of the most encouraging changes we saw in 2018 was the increase in the percentage of new appointments that were women. 33% of new appointments were female, up 25% from the previous year.

3. Representation of female directors is growing, but radical action is required to hit targets

With female board representation reaching 24 percent (up just 1 percentage point from 2017), it’s critical to understand how many more appointments are needed to reach gender diversity goals of 30 percent and 50 percent: currently, 327 female appointments are needed to reach 30 percent and 1,431 to reach full gender parity. But to find suitable candidates to fill S&P 500 boards, companies are going to need to extend their network or look further afield.

If a wider net is cast – for instance, looking at female directors on S&P MidCap 400 and S&P SmallCap boards, as well as C-level executives – then in the US alone 2,577 candidates are available. Beyond the US market, the CGLytics database shows more than 20,000 professional and experienced female candidates.

3. 27 female appointments needed to reach gender diversity goals of 30% and 1,431 female appointees to reach full gender parity

With female representation reaching 24%, we investigated how many more appointments are needed in order to hit 30% and 50% targets. We discovered that if the net is cast wider than the current 1,329 women sitting on S&P 500 boards, then an additional 1,227 female candidates are available (drawing from S&P Midcap 400 and S&P SmallCap 600 boards).

Getting ready for the coming season’s gender debate

Boards need to be fully prepared for conversations around gender diversification this upcoming proxy season and companies should be ready to provide evidence of their efforts to improve female representations.

In addition to real-time governance risk intelligence and Pay for Performance analytics, CGLytics provides companies with a networking tool for discovering and connecting with top candidates for succession planning.

Aniel Mahabier

CGLytics

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What’s New for the 2019 Proxy Season?

By looking at the UK, which currently has the spotlight on corporate governance practices, we can be sure that company boards will be compelled to implement good governance practices.

During the 2018 proxy season, shareholders engaged actively in governance matters. The CGLytics FTSE 100 Proxy Review revealed shareholders to be particularly interested in director election, board effectiveness, CEO pay and Environmental Social Governance (ESG) practice.  So what’s in store for 2019?

By looking at the UK, which currently has the spotlight on corporate governance practices, we can be sure that company boards will be compelled to implement good governance practices. They should prepare for early engagement with investors, who have expanded their ESG capabilities with access to best-in-class analytics to aid engagement and voting.

CEO Pay, Board Refreshment and Gender Diversity will continue to dominate

We envisage the following themes will dominate 2019 across Europe:

Proactive shareholder engagement 

To obtain early shareholder buy-in during the proxy season. Investors will favour an ongoing positive dialogue in preference to a reaction to a negative vote.

Transparency will endure as a central theme 

Boards should be prepared to engage openly on their board composition, say-on-pay proposals and governance decisions.

Board refreshment, gender diversity and board composition 

These will be key governance matters as investors seek to favour board strategy and composition that ties to long-term company performance.

CEO Pay 

Pay will be scrutinised – compensation policies and practices must be fully transparent and reflect, and support, business strategy and promote long-term success.

CEO succession planning 

Chairs and nomination and governance committees will be required to plan for CEO succession to mitigate business continuity risk.

Environmental, Social and Governance (ESG) 

ESG will continue to gain momentum as investors continue to become more information savvy and continue to evaluate companies’ progress on their environmental, social and governance practices.

Boards must be equally, if not better, informed as shareholders in order to engage adequately and constructively

Getting ready for the coming season

Boards need to be fully prepared for the upcoming proxy season. They must be equally, if not better, informed as shareholders in order to engage adequately and constructively, to be certain to avoid any reputational risks. Having access to the same intelligence as proxy advisors and investors is fundamental to proxy season preparedness and good governance decision-making.

CGLytics provides real-time governance risk analytics and solutions that provide actionable insight for companies, shareholders and proxy advisors. We empower boards of companies and investors with data analytics that enable good governance.

In preparation for the 2019 proxy season, CGLytics released its third annual FTSE 100 Proxy Season report. This series of articles summarise some of the key findings. Access the full insights and statistics by downloading the report.

Aniel Mahabier

CGLytics

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During the 2018 proxy season, shareholders showed increasing interest in key governance matters, including director election, board effectiveness, CEO pay and Environmental Social Governance (ESG) practices. Transparency emerged as a consistent concern.

We saw unprecedented dissent from investors on director re-elections. The number of resolutions opposing individual director re-elections rose from 38 in 2017 to 80 in 2018. The reason for the increase was due to a general concern about directors becoming ‘overboarded’ and unable to fulfil their duties. Investors were also looking closely if boards possessed the right composition including skills, diversity, and gender to support long-term growth plans.

2018 Proxy Season Highlights

Say on Pay

The GCLytics report explained that CEO pay is a real concern among investors who repeatedly voted down remuneration reports and questioned short-term remuneration plans.

Pay and performance

During the year, shareholders strongly urged companies to bring pay in line with performance and voted strongly against remuneration-related resolutions if it was seen as misaligned.

33% of companies have a pay for performance misalignment

The FTSE 100 CEO compensation landscape is evolving, with a growing emphasis on long-term incentives. However, the CGLytics study conducted on pay for performance alignment shows a material misalignment between pay and performance within many FTSE 100 companies during 2017:

  • 33% of companies have a pay for performance misalignment
  • 34% of companies display a strong alignment
  • 32% of the companies show a conservative pay practice for the performance generated, compared to other FTSE 100 companies.

 

With the 2019 proxy season fast approaching, boards need to be fully prepared to engage with shareholders. Having the same information as proxy advisors and investors is fundamental to proxy season readiness and good governance decision-making.

CGLytics provides real-time governance risk analytics and solutions that provide actionable insight for companies, shareholders and proxy advisors. We empower boards of companies and investors with data analytics that enables good governance.

In preparation for the 2019 proxy season, CGLytics released its third annual FTSE 100 Proxy Season report. This series of articles summarise some of the key findings. Access the full insights and statistics by downloading the report.

Aniel Mahabier

CGLytics

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