Institutional investors can influence activists to diversify corporate boards just as they influence the management of companies, said Hillary Sale, a professor of management at Washington University Law School.
“Activists have a hard time succeeding without institutional investors,” she said, “so institutional investors need to hold activists accountable.”
Female board nominations by activists make up just below one-fifth of candidates, according to Activistmonitor data.
Since January 2017, there have been 115 campaigns in which activists have called for board changes. Just 46 women have been nominated while 254 men were named to boards as part of the campaigns.
Carl Icahn’s five nominees to SandRidge Energy’s [NYSE:SD] board, for example, are all men. The four nominees he pushed for Newell Brands [NYSE: NWL] are men, too, including his son Brett Icahn. Also, the high-profile Xerox Corp. [NYSE:XRX] campaign saw six male nominations.
Breaking the relationship bond
“Who do activists know best? Other men who they trust to do what they want them to do for the board,” said Cindy Burrell, founder of Diversity in Boardrooms consulting firm. Activists aren’t alone in being slow to bring women on board, she said. It happens in management, too.
“It’s still difficult for (women) because they don’t have the relationships with the smaller, mid-size public company boards, which is where they’re more likely to get an invitation,” said Burrell, adding that even having a Fortune 500 corporate board membership under your belt may not help if you don’t have a relationship with the players involved. Companies may want change “but they aren’t going to rely on someone they don’t know.”
Currently, 16.6% of the Russell 3000 publicly held board directors are women, according to the 2020 Women on Boards. That’s a public awareness campaign dedicated to increasing the percentage of women on corporate boards in the US to 20% or greater by the year 2020.
Steve Wolosky, who co-chairs the activist investment practice at Olshan Frome Wolosky, calls it a “slow and evolving process.” He defends activists’ efforts to diversify boards, including the BlackRock push to add women and minorities to all-male boards. “It’s no longer a white male country club world,” Wolosky said.
Dealmakers say it will always come down to the bottom line.
“Activist funds aren’t charitable endeavors,” said a source who advises corporate boards about activist campaigns. “I don’t think you have activists who line up to say ‘There’s incredible value in diversity.’ They’re just looking for better business people with better perspective in terms of strategy, direction and execution.”
It’s about winning a proxy fight, the source added.
An executive with an institutional investment firm, agreed, describing the move to diversify boards as “honorable” but not realistic in the “trench warfare” of the business world. Honorable goals don’t always fit in the “battle of survival and victory.”
Plenty of qualified candidates
Betsy Berkhemer-Credaire, the CEO of Los Angeles-based 2020 Women on Boards, says “it’s not impossible” to see numbers go up for women on boards. “There are enough women who have served on boards to be included on an activist slate. … When investors pressure corporations to put more women on boards, the companies listen.”
She points to a 2016 Credit Suisse study that shows board diversity has long-term value.
The report states female executives in decision-making roles “generate stronger market returns and superior profits.” It found excess compound returns have expanded to 3.5% per annum since 2005 compared to companies where the boardroom is entirely male. That’s up slightly from 2014 statistics, when there were fewer women in the boardroom.
Not all activists are ignoring diversity. Activistmonitor research shows larger firms include women in their slates. Starboard Value, for example, is involved in campaigns that have one or two women on slates, including for Cars.com [NYSE:CARS], Mellanox Technologies [NASDAQ:MLNX], Newell Brands [NYSE:NWL], Stewart Information Services [NYSE:STC] and Monotype Imaging [NASDAQ:TYPE].
Penny Green, one of very few women activist investors, has included one woman in the four nominees she’s making to replace four “older white men” on the board of Glance Technologies [CNSX: GET].
“Things are progressing, compared to 20 years ago, but they could move faster,” Green said, noting there’s more progress in tech and bitcoin fields, in part because there are more women in those industries. The capital markets, she said, is an older industry started with next-to-no-women, so the hurdles are higher.
Though dozens of companies have included board diversity resolutions over the past year, few get shareholder approval. Two notable exceptions are Cognex [NASDAQ: CGNX] and Hudson Pacific Properties [NYSE: HPP], which last year saw 63% and 85% support, respectively, according to the independent corporate governance consultancy Glass Lewis.
It’s a smart move as institutional investors latch on to the issue. New York State Common Retirement Fund announced recently it would vote against all corporate boards of directors at companies with no female board members.
The discussion about diversifying boards often centers on whether companies bring on directors who have too much in common—they are alums of the same college, run in the same social circles or golf at the same clubs. Those similar views may lead to myopic examinations of a company instead of a 360-degree view.
There’s also an argument that adding a female board member who comes from the same Ivy League school doesn’t do much for diversity either, says Simon Arcus, CEO of the Institute of Directors in New Zealand. “If you substitute the gender but keep all other aspects of the background the same, do you have sufficient impact?”
He sees the answer in creating a better pipeline for board positions but acknowledges that, too, can be a Catch-22. “They say women need experience to be appointed to a board, but you can only be given experience if you have the opportunity to sit on those boards.”
Peter Gleason, the president and CEO of the National Association of Corporate Directors, said there’s an easy way to create a pipeline, and corporate boards that are pro-active about diversifying might also circumvent activist slates. He recommends replacing non-strategic board members and establishing advisory boards as a pipeline.
“Unless you’re in the medical field, most public companies don’t have advisory boards. But that’s a great way to build expertise. It’s a great farm system,” said Gleason. “The idea is to develop talent over time and you gain a wide variety of perspectives that can supplement those of the board members sitting at the table. It allows boards to tap into their specific expertise as needed.”
by Shia Kapos in Chicago