An investor's perspective
The Markkula Center for Applied Ethics’ Business Ethics Program launched Workplace Diversity Dialogues a dialogue series exploring workplace diversity and inclusion issues. During this dialogue, sponsored by the Ethics Center’s Partners in Business Ethics, Michelle Edkins, managing director of investment stewardship at BlackRock, and David Yosifon, SCU law professor, had a conversation about the importance of diversity in the boardroom.
Shortly before this program took place, Larry Fink, CEO of BlackRock, released his yearly letter, which informed business leaders that companies have a larger responsibility to society than to simply make profits. Fink also wrote that BlackRock’s investment companies should contribute to society if they want to receive BlackRock’s continued support. Fink’s letter set the context for Edkins’ talk at Santa Clara University on Jan. 18, 2018.
Edkins opened the program by explaining that board diversity at the governance level is an investment issue because boards enact lasting change and set long-term strategic direction for organizations. She said that, for the most part, boards and business leaders are knowledgeable about the benefits of diversity, and they believe the research that a diverse team makes better decisions. But despite this information, boards continue to remain homogenous. Edkins explained that boards don’t make diversity progress for two reasons: 1. They don’t like change and 2. People like being with other people who are similar to themselves. As a result, Edkins said BlackRock is “tired” of making the business case for diversity, so BlackRock is now setting expectations for diversity change at the governance level in their portfolio organizations. She stressed that BlackRock cannot mandate a company to do anything, but they can ask questions and make recommendations to their investment companies.
Edkins’ comments at SCU were highlighted by the Wall Street Journal, and shortly after the event, BlackRock announced it will start to buy and hold direct stakes in companies, replicating the approach of Warren Buffett’s company Berkshire Hathaway Inc.
Program notes on diversity and governance by SCU professor Jo-Ellen Pozner
18 January 2018
Michelle Edkins, BlackRock
David Yosifon, SCU Law
Blackrock’s message to investors: https://www.nytimes.com/2018/01/15/business/dealbook/blackrock-laurence-fink-letter.html
- Board diversity is an investment issue because shareholders have a role in determining who is in the room, and because they enact change and set long-term strategic direction
- It is the decision-making body. Important that there are high-caliber people there who will challenge management, bring their own ideas, have different perspectives – higher probability that you are looking at the different aspects of the business that will impact long-term performance and defend against threats
- Believe the research that says that diverse groups make better decisions!
- Employees look at top leadership for guidance and inclusion – will not see a long-term career at a company if they do not see themselves reflected at the top
- Diverse boards and diverse senior leadership tend to go hand in hand – if there are not diverse senior leadership teams, we know they are not retaining the best talent
- 22% board seats in S&P500 held by women, far fewer racially diverse directors
- Now setting expectations for change with firms in which they have invested, which is essentially all, because they are an index fund
- Now reached point of frustration because keep getting lame excuses and can’t deal anymore
- Writing to 300 companies in Russell 1000 that have fewer than 2 women on board, ask them to explain approach to diversity on board and within employee base, and for a plan to remediate in the future
- Why focus on women? Because almost never have ethnic diversity without women there first
- Gender is the most easily readily identifiable markers of diversity at a distance and across scale, so easiest to target first
- US does not have target or quota – not the only way to get to better outcomes, so very important for investors to take the lead in pushing for change
- Doing similar work in Switzerland, starting in Japan, where there are similar issues (in Japan, it is about board independence)
- 30% club, 30% coalition are important grass-roots groups
- How do you pressure firms to do what is right if it not in the best interest of profit maximization
- Can’t really do that as fiduciary investor on behalf of clients
- Can enable firms to make good decisions to make responsible investment decisions
- Returns versus all things companies do is not the appropriate tradeoff
- Invest in companies that do things that some people do not like, for certain
- Business judgment allows Blackrock to support companies that trade-offs between short-term profits and long-term sustainability, profitability, etc., if that is the best judgment of the company. That’s the way this works!
- Will vote against management if that is the right thing to do, but also expect firms to push back if BR is making a mistake about long-termism
- Do ethical problems thrive in the trap of long-termism? Young people want long-term returns, but older people do not.
- But long-term is made up of lots of short-terms! Get regular checkpoints, etc. Just want to be building toward something through sustained performance over time, which requires managers to have a long-term mindset.
- Option of exit is not present because index fund, so can only engage through active investing.
- What do you think about dual class structure? Seems like an increasing trend, shuts out activist investors, shareholders have no say.
- Don’t like dual-class or non-voting stock, but not much BR can do about it
- Unfettered managers only do well for so long
- Enough investors at early stage will get burned by this uneven power dynamic that they will be noisy and protest, and hopefully listing agencies and regulators will create and enforce standard of one share, one vote.
- How do they work with regulators, etc.?
- How framework supports type of activity BR sees in long-term interest of clients is fair game. Allow investors to talk to board and companies, eg.
- Not activism, where force something through and have power to do it. Engaged ownership, where set out views, expectations, etc., and let board/management decide what is best for them to do. Still a minority shareholder, after all, and decisions are for the board. BR uses voice and influence but has no power and cannot force change.
- How do you engage? What does it look like?
- One side asks for a meeting about particular issues
- Often a phone conversation
- Always have an agenda, questions, etc. E.g., describe succession plan. how often do you think about management succession plan? Firm-specific questions. Make sure that firm understands BR’s perspective on those issues and listen to what company has to say about its perspective to get nuanced view of firm, its position, how it is managing business, etc.
- Why do boards not already understand that they should have diversity on boards and implemented it on their own?
- People don’t like change
- People like being with others like themselves
- Boards that decide to be more diverse make it happen, and don’t perceive supply problem. They look for skills rather than profiles, and look for where those skills reside (ie, not always in CEOs). CEOs are not always very good board members because they are used to being decision makers and sometimes have a hard time adapting to an environment where they are guiding and counseling but not necessarily doing.
- Too easy to get off the hook by saying “this is a social issue not a business issue” – BR sees this as a business issue with positive social externalities, not the other way around.
- Push for diversity of perspective rather than just social category diversity? How to prevent minority group members from becoming marginalized on the board?
- Definitely want diversity of perspective, but believe that people with different life experience have those perspectives – faith, sexual orientation, where you grew up are also important markers of diversity
- Token diversity never works – if people don’t fit, they leave. So quotas for recruiting often backfire. Now focus on inclusion is really helpful and moving the needle for people who do not believe that diversity is actually important.
- Harder to chair a diverse board, because need to draw out perspectives, manage positive conflict, meetings take longer, etc. so much harder work for chair. So encouraging diversity suggests a commitment to spending more time.
- If discussion and persuasion doesn’t work, can get change via shareholder vote at the shareholder meeting. BR can put a proposition before shareholders. Does it?
- BR escalates by giving firms time to change, then vote against issues on the shareholder meeting agenda, but will not put issues on the shareholder meeting agenda (that is typically done by very small shareholders)
- If can’t sell, what kind of threat do you represent to management? First thing that hostile managers say is, go ahead and sell – then they get rid of you! Since BR can’t sell, presence becomes pressure and becomes power. Don’t like it when major shareholders vote against them.
- BR has to file voting record with SEC every year, gets lots of attention, so everybody will see what they are voting on
- Public will also see that BR set out case for change and firm ignored them, so most will comply
- Need to build and then draw on networks actively to get people placed on boards
- What has worked at the policy level? Government and private sector worked together in UK, government said biz doesn’t like quotas but they have not yet solved problems; gave biz 3-5 years to figure it out and if not solved, we’ll introduce legislation. And it worked. 30% club has been really successful. Board chairs are independent in UK, committed to getting 30% of women on boards. Policy threat and private action together moved the needle. Possibly more successful than quotas.