By Maddy Beaudry · On April 19, 2016
Volatile financial markets and escalating shareholder demands have contributed to a creeping pressure on corporate governance to evolve. This past year, the proxy advisory firms of Institutional Shareholder Services (ISS) and Glass Lewis & Co disclosed their policy recommendations for TSX-listed issuers in the 2016 proxy season. The enhanced guidelines addressed several hot topics, including perceived compensation concerns and disclosure of environmental and social issues. Most notably, the advisors tightened their definition of an overboarded director, further restricting the number of public company boards on which a director may serve. The revised policy, to be rendered effective for meetings on or after February 1, 2017, could hinder women in the workplace; however, it could also prove beneficial on the whole in the long run.
This amendment was met with a discordant melody. The new magic number is two seats for any executive officer serving as director and five for auxiliary directors, reduced by one slot each. This reconsideration was motivated by recent academic research that negatively links a director’s perceived over-commitment to their effectiveness by dissecting company performance. According to PWC Annual Corporate Directors Survey, directors themselves doubt the consequences of potentially overstretched commitments — 61% of respondents citing they don’t believe they have board members who should be replaced, whereas only 7% boast the sentiment that a fellow director serves on too many boards. However, the concern gains validity as the average time pledge for board service has swelled dramatically over the past decade. The commitment now hovers around an average of 248 hours per year for a single board, including ancillary meetings with management, up from just 105 hours. Such time commitments can be attributed to increasingly complex roles in the modern business climate, coupled with climbing investor scrutiny.
An unintended implication of this reform is the negative impact on board diversity, as there lies the potential for the effects of these proposed targets to disproportionately effect women. There is a clear and well-documented business case for women on corporate boards. Investors are putting their money where their mouths are and are literally banking on this contribution to the bottom line, as seen in the uprising of specialized funds that invest in women’s leadership: for instance, the Morgan Stanley Parity Portfolio. Female directors are a hot commodity as Canadian issuers endeavour to up the ante on gender diversity in governance. Female board representation has edged up over the past decade, yet there is still a smattering of women holding a large share of positions. These individuals, current or retired CEOs, are already flirting with existing thresholds and turning down seat vacancies. The more rigorous proposed targets by proxy advisors are sure hit them at the knees.
The disruption in this arena has the potential to undermine the progressive efforts of women in the workplace at all levels. Greater representation of female directors has considerable effect on advancing women to the C-suite and other executive roles. Studies of Fortune 500 boards demonstrated a positive correlation between the presence of more women in the boardroom and a consequent rise in female executives, intensely in esteemed profit-and-loss roles. As overboarded women are forced to forfeit their directorships many more are halted in their tracks.
The magnitude of the turmoil is a function of issuers’ abilities to identify qualified, diverse candidates and nominate them to fill the voids. PwC’s 2015 Annual Corporate Directors Survey reveals that more than 70% of directors at least “somewhat” believe that there are impediments to increasing board diversity via nominations. However, it is no longer acceptable to assent that the primary hurdle is a limited pool of strong candidates. The most desirable director attributes sought are financial expertise (described as “very important” by 91%), industry expertise (70%), operational expertise (66%), and risk management expertise (62%). There are strong female candidates to fit the bill. It may take more time to seek out these less visible candidates, but it is time for issuers to prioritize and commit to this search.
Now is the time for advocates to emerge. Existing female directors are key players, as research highlights that not only do they consider board diversity of higher importance than their male counterparts, but also believe more strongly in undertaking arduous director succession planning. This appetite is also emulated by directors with longer board tenure. Larger companies can be expected to set the tone, as diversity in board composition is venerated in 67% of mega-cap companies, parallel to only 31% of micro-cap companies. The sentiment towards director succession planning shares a similar ratio.
Part of the disparity in temperaments can attributed to the rise of shareholder activism on scale to larger issuers. Shareholders are demanding more attention to governance issues of companies that can foot this bill. Investor voices are becoming louder than ever as lines of direct communication to shareholders gush open, and the opinions can be deafening, as in the case of increasingly popular say-on-pay votes, with the potential to rock financial markets. Though the policy recommendations set forth by proxy advisors are not binding, it is shareholders who demand accountability. Shareholder activists create polarizing effects on boards as they continue to exacerbate the dichotomy between short and long term focus. Shareholders are at the helm of the strategy boards will use to grapple with these tensions.
At the epicentre of all this, is a utilitarian argument that this policy revision is a silent blessing in governing for the long term. Stripping overboard directors, both male and female, creates an abundance of vacant seats that spur opportunities. The current gender dynamics could play against the majority. With changes effective in 2017 or later, issuers have time to find qualified and diverse candidates, yielding positive spillover effects across all organizational levels. If issuers fail to act, shareholder activists will come knocking. A temporary blow to diversity could be the long awaited fracture in the glass ceiling that is so desperately needed.