Ethnic diversity in UK boardrooms is likely to be a key focus of this year’s annual general meeting season (AGM), according to trade body the Investment Association (IA).
For the first time, its corporate governance research arm IVIS will issue an “amber” warning to FTSE 350 companies that do not disclose the ethnic makeup of their board. The IA flags up company issues according to colours: blue indicates no major concerns, amber highlights a significant issue, while red flags up a breach of best practice or IA guidelines.
Companies with no credible plan for meeting targets under the Parker Review, which recommends boards have a minimum of one ethnic minority member by 2021, will also get an amber warning.
This is the first year that companies’ actions to address a lack of ethnic diversity at the highest level will be revealed. In 2020, just 27% of FTSE 100 firms made a disclosure.
Andrew Ninian, director for stewardship and corporate governance at the Investment Association, says: “UK boardrooms need to reflect the diversity of modern-day Britain. With three-quarters of FTSE 100 companies failing to report the ethnic make-up of their boards in last year’s AGM season, investors are now calling on companies to take decisive action to meet the Parker Review targets. Those who fail to do so this year will find themselves increasingly under investors’ spotlight.”
The IA also highlights gender diversity as a key issue in this year’s AGM season, with investors keen to see how much progress has been made under the Hampton-Alexander Review, an independent body set up five years ago to improve boardroom representation of women. Unlike countries such as Iceland and Denmark, where boardroom gender diversity is legally mandated, the UK has a voluntary regime.
Climate change will also be near the top of the agenda this year as investor interest in ESG issues grows. How fund managers vote and exert influence on the companies they own will be closely scrutinised, says the IA’s Ninian: “The UK is now at critical juncture as we look to reach net zero by 2050. As stewards of the economy, investment managers have an important role to play in supporting companies transition to a more sustainable future.”
What to Expect From AGM Season
AGM season is a central part of the corporate calendar as it allows investors of all sizes to voice their opinion on how a company is doing. Voting on resolutions is a key way for investors to approve or decline measures to re-elect certain directors, judge the remuneration report and assess dividend policies.
In the aftermath of the financial crisis, executive pay became a lightning rod for shareholders, with pay “revolts” coming thick and fast. This issue has not gone away, and investors will be particularly monitoring pay at companies that have received furlough support. However, climate change and the boardroom representation of women and ethnic minorities has moved up the agenda in recent years and the Covid pandemic has given the “S” in ESG much greater prominence.
Even if you don’t own shares directly in a company, a fund manager or pension fund may be voting on resolutions on your behalf. You may not be aware that an AGM is occurring or what the issues are, but you may have voted indirectly anyway. This is known as proxy voting: “Proxy voting allows shareholders to influence company operations and decisions; it’s the primary way that you can have a say in how public companies around the world are governed,” says Morningstar’s Jess Liu and Carole Hodorowicz. They say the biggest asset managers such as BlackRock have a big sway over AGM votes, and can use this voting power to affect change.
Away from AGM votes, fund managers in the UK have exercised their power over corporate governance issues in recent years, such as the row over working conditions at Aim-listed clothing company Boohoo (BOO). Aberdeen Standard Investments, for example, exercised its power by selling its stake in the company in response to the scandal. Social and governance concerns are also central to how investors interact with natural resources companies, as shown in the backlash against miner Rio Tinto (RIO), which destroyed a site of historical significance in Australia. The row forced out chief executive Jean-Sebastian Jacques last year, although he is receiving a “golden goodbye” worth over £7 million, something that shareholders will get to vote on at the company’s AGM on April 9 2021.
