In Promoting Board Diversity — Should Investment Funds Practice What They Preach?

By Beth Senko

The push for increased diversity on corporate boards has been going on for some time. But the push for diversity hasn’t really reached the boardrooms where those shareholder votes are cast.

Last September, The Thirty Percent Coalition, a group formed in 2011 to address issues of gender diversity in the boardroom, congratulated eight companies for adding women members to their boards and noted that overall progress continues to be slow. However, there were a couple of bright spots:

“During the 2013 proxy season, shareholder resolutions on board diversity were filed with 25 companies. Of the 25 shareholder resolutions filed, 18 have been withdrawn based upon mutual agreements, an important mark of progress in the work on board diversity. Three board diversity shareholder resolutions went to a vote in 2013: proposals at CF Industries, Urban Outfitters, Inc. and Freeport-McMoRan Copper & Gold Inc. received support of 50.7 percent, 27.5 percent and 28.9 percent respectively. The impressive vote at CF Industries marks the first time a board diversity resolution has received majority support from shareholders.”

Many members of The Thirty Percent Coalition come from the institutional investing world and while its member firms lead in the area of board diversity, according to a recent study by BoardIQ, women may not be doing as well in the fund management boardroom as they are in the corporate boardroom.

BoardIQ studied fund filings on board composition of the 20 largest fund groups by assets and 125 other random boards overseeing assets ranging in size from $19 million to $193 billion. Their analysis showed, “nearly a quarter, including Pimco, DoubleLine and Fidelity Sector Funds, don’t have any, the analysis shows. Another 30% of boards have only one woman director.”

Put simply, 55% of fund boards examined have either one woman or none. In contrast, a 2013 study by 2020 Women on Boards shows that 43% of the companies in the Fortune 1000 index had one or fewer women board members. While the studies aren’t directly comparable, the twelve percentage point difference merits further study.

Is the problem a lack of qualified women candidates?
The BoardIQ study quotes Kristianne Blake, Independent Chair of the Russell Funds noting that board recruiting hasn’t changed that much over time. “I do feel historically the way board seats have been filled is the old boys’ network. It’s who you know.” At the same time, while the network expands when women are on the board, “the pool is smaller of women candidates, so boards have to make an effort to include them in the pool. You’ll have to aggressively look for women candidates.”

The number of women candidates available varies according to source. The University of Mannheim estimates that approximately 10% of equity fund managers are women. On the upper end, an estimate by the Mutual Fund Directors’ Forum says that women account for about one-third of qualified candidates.

Qualifications to be on a fund board are more specific than the qualifications for general corporate board. Candidates need to have an in-depth understanding of investment management including different styles, investment vehicles and measurement techniques. So candidates generally have to come from inside the investment management industry.

Is the challenge raising the issue with fund shareholders?
But what if the difference stems from a lack of shareholder interest in 401k and mutual fund investments?

Investment managers spend lots of money to meet fiduciary duties and vote in the best interests of their shareholders. It’s their job. Board slates, recruitment language and other proxy issues are thoroughly vetted before voting.

Fund shareholders, on the other hand, tend to be individuals, some with little or no investment expertise. Many individuals have their investment and retirement money spread over myriad funds and fund companies. If individuals read their investment statements at all, they likely look at overall performance and probably skip over proxy issues like board diversity. The calculus becomes even more complicated when one considers how many individuals pick their mutual fund investments. The benefit provider picks the funds – and changes them when appropriate and the individuals pick from the list of choices as if they were at the salad bar. Even a well-informed investor with a diversified portfolio of assets probably doesn’t have the resources, much less the interest, in tracking the make-up of the fund boards that manage their assets.

With more and more retirement and pension money managed by a multitude of outside managers, Individual investors have little or no awareness of fund board diversity – and probably less interest. This may partially explain the gap in fund board diversity. The next question is how to raise awareness and interest in the issue.