One of the issues plaguing corporate America is the lack of diversity on company boards. But now there’s a realization that there’s a unique opportunity for one group of investors — the activists — to change all of that.
“I actually have wanted to run a proxy contest with an all-female, diverse ethnic slate,” said billionaire hedge fund manager Bill Ackman, the CEO of $8.2 billion Pershing Square Capital Management. “First of all, I think it sends an incredible message and I think we would win hands down. I really mean that.”
Ackman, a well-known activist investor, took questions earlier this week at the 13-D Monitor Active-Passive Investor Summit in New York. While it wasn’t explicit, the clear overarching theme of the day across the panel discussions and presentations was gender diversity in boardrooms.
The numbers are dismal
It’s well-known that women and other minorities are noticeably underrepresented on corporate boards. Since 2009, executive search firm Heidrick & Struggles has published its Board Monitor, which tracks the filling of vacant board seats. In 2016, the most recent report available, Fortune 500 companies filled empty 421 seats, with 117 of those seats, or 27.8%, going to women, down from the 119 women filled the 399 empty seats the previous year, representing a 2% drop, or the first decline in seven years.
According to the latest Board Monitor, African-Americans made up 9% of the new seats, while Hispanic and Asian/Asian-Americans accounted for only 6%. What’s more, the average age of the board seat was 57, with more than half serving or having served as a CEO or CFO. Two-thirds of the new directors had previous board experience.
“Research in recent years has shown a correlation between gender diversity on boards and superior shareholder value. When the numbers of board directors of African-American, Hispanic, and Asian descent reach critical mass, which will enable statistically significant correlations with shareholder value, we believe the results will be the same,” the Board Monitor report said.
An argument can be made that no other investor group plays a more crucial role in placing board directors than the activists. These investors buy large stake in publicly-traded companies and push for changes from company management. Sometimes companies aren’t receptive to the activist, and it can result in a proxy fight with the aim of shaking up the board.
“Pale, male, and stale”
Bruce Goldfarb, the CEO of Okapi Partners, advises activists in their campaigns when it comes to evaluating current boards and putting together dissident board slates. Nowadays, diversity matters to the largest shareholders.
“We are in an environment now where the largest shareholders are saying, ‘We want a diverse board. We are concerned with gender diversity. We are concerned with having people of color on the board,” Goldfarb said during his panel.
One of the issues he pointed to is a long tenure, with some directors serving extensive stints on boards.
“I’ll be the first to talk about being pale, male, and stale today,” Goldfarb said. “But that becomes the issue. Part of an electable slate is identifying people of talent, who solve the issues, who are truly diverse in terms of gender, race, skills, and expertise to create that electable slate.”
In response to a question from a reporter, Ackman said he’s personally a “huge believer in board diversity.” He pointed to Pershing Square Holdings, the publicly-traded vehicle for his firm, noting that the chair is a woman and one-third of the board directors are female.
He admitted that it’s difficult for him to recruit directors, particularly women, in the activist context. He’s hopeful that will change.
“I think as more women serve on activist slates, it will make other women more comfortable on activist slates,” Ackman said, later adding, “If you’re a diverse candidate, whether it’s gender, ethnic, or otherwise, and you’re interested in serving in an activist context, get in touch with us.”
Breaking the glass board ceiling
One of the barriers women face is that many don’t have prior experience on boards. About one-quarter of the female board appointees in 2016 had previous board experience, according to the Board Monitor report.
“What the shareholders can do is … make clear the fact that someone who hasn’t served on a board before shouldn’t disqualify them from being a credible candidate for a board,” Ackman said. “One way to make it difficult for people to break the glass board ceiling is to say one of the qualifications for serving for winning on an activist slate is that you have to have already served on a board. That kind of stuff creates barriers that are problematic.”
Activists don’t always have to launch proxy fights to exert change. Hedge fund manager Cliff Robbins, the CEO of Blue Harbour Group, often referred to as the “friendly activist” having never run proxy contest, makes it clear before he invests that gender diversity and other ESG considerations matter.
“It’s in the company’s social attitude and profile where we really can make a difference. I think the most important thing we do at Blue Harbor is assessing the management team,” he said. “So, when I’m sitting down now with a CEO before I invest and I’m asking them a bunch of questions — ‘Tell me what you think about gender pay equality. Are their opportunities for women and minorities in your company? Do you have a diverse board?”
For Robbins, it’s important that management has the right answers to these sorts of questions. It’s also important for investors to hold those companies accountable.
“When I’m calling up my CEO three months after we made the investment, in addition to saying, ‘Where are we on this spinout? Where are we on the balance sheet? Where are we on the margins?’ I’m saying, ‘ Where are we on that commitment you made to me to make the board more diverse?’”
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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.