L-R: David Frost, Bosa Kosoric and Lauren Muirhead, McCarthy Tetrault LLP
Gender diversity at the Board level has been a high-profile issue for the past few years. In September 2018, the Canadian Securities Administrators (CSA) released Staff Notice 58-310 summarizing the results of its fourth annual review of the gender diversity of Boards and executive officer positions for issuers across Canada.
The Notice indicates that issuers are making improvements in each category of gender diversity that the CSA reviews. In particular, the proportion of issuers that have no female directors decreased from 66% to 33% over the last four years. However, the overall rates of change have been minimal and women are still severely underrepresented in Canadian boardrooms. Last year an average of only 15% of Board seats were held by women, up from a meagre 11% in 2014. With this pace of growth, it could take decades before the proportion of Board seats occupied by women reaches even 30%.
Why should issuers care about Board gender diversity?
1. Institutional investors require it.
Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have taken notice of the pace of change in this area and have implemented the following new policies to address the gender diversity issue:
- For annual meetings held on or after January 1, 2019, Glass Lewis will generally recommend voting against the nominating committee chair where a Board has no female members and also where the Board has no formal diversity policy.
- For annual meetings held on or after February 1, 2019, ISS will recommend voting against the Chair of the nominating committee for S&P/TSX Composite Index companies and other ISS designated companies where the issuer both has no female directors and has failed to disclose a formal gender diversity policy.
ISS and Glass Lewis provide some exceptions to these recommendations for smaller or newer issuers, and may also take into consideration the fact that an issuer has disclosed timetables and targets to address its lack of gender diversity. However, issuers shouldn’t rely on such narrow exceptions to avoid taking action, because institutional investors will progressively put pressure on all issuers without female directors to make real improvements or to justify their failures in this regard.
2. Stakeholders expect it.
For the majority of issuers, their clients and investors are composed of a mixture of genders, ethnicities, and backgrounds. Shareholders are becoming increasingly involved in corporate governance and expect to see a Board of Directors that reflects the diversity of its stakeholders. An issuer that fails to address director gender imbalances may be seen as static and out of touch with modern economic realities and can face public image consequences as a result.
3. Diverse groups make better decisions.
Put simply, diversity makes a Board more resilient. It helps to avoid dangerous groupthink by encouraging considered decision-making. Some studies have shown positive correlations between female directorship and the market performance of a company, especially in cases where women comprise at least 30% of the Board.
As the demand for issuers to implement formal diversity policies and improve female directorship grows each year, companies will find it increasingly hard to ignore gender imbalances in the boardroom. Along with proxy advisory firms, the SEC is making gender diversity a priority this year and has recently released interpretive guidance on Board diversity disclosures. While the latest CSA review of gender diversity in Canada shows small signs of improvement, issuers will need to take a proactive approach to change the corporate governance culture that has led to the continually dismal numbers of female Board members.
Issuers can look to the following strategies to improve Board diversity:
- Stop looking to the C-suite – the most sought-after candidates for the Board tend to be those with executive experience, but the same diversity problems that are present in the boardroom exist at the senior management level. Think outside the box, look to different markets and search for individuals with the skills, education and experiences that the current slate of directors is missing.
- Professionalize the Board recruitment process – retain a professional search firm to help diversify the Board. Articulate a recruitment policy that attempts to eliminate bias towards subjective concepts of ‘merit’, which perpetuate homogeneity in the boardroom.
- Introduce a formal gender diversity policy – while this is now becoming essential for TSX issuers, smaller issuers will also benefit from adopting a written policy that signals their commitment to gender diversity.
- Set gender targets – unsurprisingly, issuers that implement diversity targets have higher numbers of female directors. The feasibility of these initiatives may vary depending on the type of industry and the Board's size.
- Set director term limits – the 2018 CSA staff review found that 29% of vacated Board seats were filled by women. This is a promising statistic, but gender imbalance at the Board level won’t change unless there are opportunities for it to change.
- Aim high – having one woman on the Board is a good start, but it may be insufficient to produce lasting positive effects. An issuer that consistently has a lone female elected to the Board may suffer from the appearance of tokenism. It will ultimately be easier for an issuer to attract and maintain strong female talent if the issuer can demonstrate that it fosters a culture of diversity and values the role of female directors as something more than checkboxes to be ticked or quotas to be filled.
David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-authors Bosa Kosoric (Associate) and Lauren Muirhead (Articling Student) at McCarthy Tétrault LLP in Vancouver.