Diversifying Diversity: Going Beyond Representation

November 5th, 2020 | Daniel Jarman, Rosa van den Beemt

The issue of diversity has had some growing up to do. While investors have traditionally focused diversity engagement on gender, which is relatively easy to measure because data is available, recent global anti-racism protests have forced corporations and investors to re-examine diversity priorities.

Public debate about systemic racism is also set against the backdrop of the stark realities of the COVID-19 crisis, which has had a disproportionate effect on vulnerable communities, underscoring the need for companies to prioritize long-overdue issues around racial inclusion, worker protections, pay equity, business ethics and human rights.

Expectations of companies as well as of us as asset managers have changed, and investor engagement on diversity can no longer focus on gender or representation issues alone: the topic of diversity has diversified.

Business Case

A changing global marketplace, evolving stakeholder demands and reputational risks, coupled with more robust research on the value add of diversity in general, has made diversity a corporate differentiator. Research shows that having diversity at all levels of the organization combats tunnel vision, can lead to better identification of risks and opportunities, fosters innovation and correlates with better performance.[1] And, companies proactively addressing discrimination issues tend to have better employee engagement, healthier work cultures, less reputational risk and better brand engagement.[2]

Despite this evidence, progress on gender diversity is still not where investors want it to be, and progress on racial or ethnic diversity in the corporate workforce, especially at corporate leadership levels, is significantly lagging recent progress made on gender diversity. The varying levels of (un)available diversity data globally presents a challenge to investors. This is where engagement comes in. Globally, our engagement focuses on:

  • Strategy-setting at the top
  • Setting targets and measuring progress
  • Hiring practices
  • Equitable pay
  • Employee engagement
  • Education and training

Diversity: different in every context

We consider diversity within an organization to be beneficial regardless of geographical location.* Given the varying regulatory environments, stakeholder groups and cultures that a corporation may operate in, the focus for diversity for one may not be suitable for another. There are obviously regional and market specific areas of focus that all should be aware of, but how they are addressed will often vary and evolve. We discuss some examples below.

Gender

Diversity for many investors started with a focus on gender. The 30% Club, founded in 2010, is an example of a group that has helped drive genuine change, particularly in boardrooms around the world.

Local cultural context is key. In Japan, where progress on gender diversity in corporate leadership has been slow, female talent historically was not supported through child caregiving years and the long working hours culture negatively affected opportunities for women to advance their career. Through our engagement on diversity in Japan however, we were able to identify good practices. For example, JPX, in order to promote diversity, has recognized it needs to reform how it views work, improving flexibility and recognizing the productivity that different work styles can bring. It implemented several initiatives including schemes to support child caregiving and career training, specifically aimed at supporting women throughout their career development.

Ethnicity, race and indigeneity

What diversity of ethnicity looks like varies regionally. Ideally, a company’s workforce and leadership reflect the make-up of the society it operates in. Again, understanding context is key: what are regional underrepresented groups and how does historic discrimination still manifest today? In the US, only 3.2% of executives and senior manager-level employees are Black while Black people represent 13.4% of the US population. In Canada, where Indigenous people make up close to 5% of the population, they make up far less than 1% of senior executives and board members. That indicates there are structural barriers to advancement.

Investor engagement on racial diversity is not as well-established as engagement on gender diversity. However, this is changing at an accelerated pace. Several asset managers have publicly announced engagement frameworks around racial diversity on U.S. boards. The U.S. Racial Justice Investing Coalition (RJI) recently released a statement whereby investors commit to embedding racial justice into investment decision-making and stewardship strategies.[3] In Canada, the RIA’s recently released Investor Statement on Diversity & Inclusion, calling on investee companies to enhance diversity and inclusion efforts of underrepresented groups, including Black, People of Colour and Indigenous people, represents another significant step forward.

In our engagements with North American companies on racial diversity this year, we’re encouraged to learn that boards are already feeling the investor pressure and are prioritizing the search for diverse director candidates.

Experience and background

Companies with global operations benefit from having an experienced mix of directors as well as leadership with backgrounds and experiences reflecting the regional customer and employee base. We see this as a particular issue in Japan and Korea where an organization may have a large global operational footprint that is not represented in any way on the board.

ESG context is also key: in order for companies to be prepared to address increasingly complex material ESG risks and opportunities, having senior leadership and board members with ESG-related expertise can be a particular advantage. For example, the number of directors sought with cyber security expertise has accelerated in recent years.[4] We have also seen (and advocate for) an increase of directors with climate change-related expertise, specifically for companies operating in sectors for which climate change poses a material risk. Lastly, the COVID-19 crisis has shone a bright spotlight on the need for worker protections and human capital management risks; as such, it is no surprise more policy makers and investors are considering the benefits of having employee representation on boards.

Which types of diversity should investors focus on?

The following questions can help investors determine what types of diversity to encourage at investee boards, senior leadership and other levels of the organization:

  • What is the cultural or socio-economic context a company operates in and how are related challenges addressed?
  • What is the company’s geographic footprint and customer base, and is this reflected in its workforce and leadership?
  • Does the company’s workforce and leadership reflect the diverse make-up of society in the region it operates?
  • Are there sector-related material ESG challenges that a specific mix of diverse talent can better help address?
  • How does the company report on its diversity performance across the workforce, and on diversity and inclusion efforts?

Beyond representation

We note that a company’s social licence to operate could be threatened if it does not address the expectations of its stakeholders, which can include expectations on diversity within the organization. However, diversity and inclusion efforts are only one part on the path towards solving systemic inequality. Beyond addressing representation issues in the workforce and C-suite, companies must reform business models and actions that profit from perpetuating inequities. This spans from companies benefitting from prison labour, to surveillance software with inherent racial biases, or marketing strategies that target vulnerable communities. Investor engagement can help companies align with the UN Guiding Principles for Business and Human Rights to enhance their social license to operate and be better prepared to address social inequities and related issues such as human rights, indigenous rights, living wages and worker protections.

Key takeaways

  • Diversifying investor engagement on diversity is crucial to understanding the risks and opportunities companies are facing as well as to meeting wider societal and client expectations;
  • Assessing how diverse a company and its leadership is requires understanding cultural, regional, historical and ESG contexts;
  • To address matters of equality we have to look beyond diversity and inclusion to business models profiting from perpetuating inequality.

Further reading

  • Racial Justice: The imperative for investor action – August 2020 BMO GAM ESG Viewpoint
  • A focus on gender diversity – March 2020 BMO GAM ESG Viewpoint
  • BMO GAM’s Expectations on Social Practices statement – March 2020

Sources:

[1] McKinsey & Company: Delivering Through Diversity

[2] https://www.weforum.org/agenda/2020/07/racism-bad-for-business-equality-diversity/

[3] https://www.racialjusticeinvesting.org/our-statement

[4] https://www.forbes.com/sites/chenxiwang/2019/08/30/corporate-boards-are-snatching-up-cybersecurity-talents/#47b755e3479f

Notes:
* We consider diversity to include gender, ethnicity or race, Indigenous status, sexual orientation, age, disability, background, experience, religion, culture and socio-economic status.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Author

author's photo

Daniel Jarman

Vice President, Responsible Investment
BMO Global Asset Management

Daniel Jarman is Vice President in the RI team, focusing on corporate governance, particularly in the UK. He was previously at voting service provider ISS, which he joined in 2006 following two years at Manifest. Daniel became ISS’s Head of UK Governance Research in 2009, responsible for publication of reports and vote recommendations on UK-listed companies. He subsequently led the Customised Research team, providing ESG policy development and application services to UK institutional investors. Daniel was also a member of the Global Policy Board for ISS and served as the London office compliance liaison officer and co-head of the London office. Daniel is a regular speaker on governance issues around the world.

author's photo

Rosa van den Beemt

Vice President, Responsible Investment Analyst
BMO Global Asset Management

Rosa is a corporate engagement practitioner with over 6 years’ experience in the responsible investment industry and joined BMO GAM’s Responsible Investment team in early 2020 where she focuses on engagement and voting of the North American market on corporate governance, human rights and climate change. She also serves on the Steering Committee for the Investor Alliance for Human Rights aimed at integration of the investor responsibility to respect human rights through the investment process. Previously, Rosa was Senior ESG Manager at NEI Investments, the asset management arm of Canadian wealth firm Aviso Wealth, where she lead the proxy voting program as well as various corporate engagement initiatives on ESG topics. She holds a BA in Political Science and an MSc in International Development Studies from the University of Amsterdam.