L&G pursues board diversification to boost returns

More diversified boards can produce better returns for shareholders, according to Sasha Sadan, director of Corporate Governance at UK manager Legal & General Investment Management (LGIM).

Sadan, who took up his role only recently, said that pushing boards on levels of diversity made further sense given LGIM’s engagement with businesses in which it is a long term shareholder  – in particular because of its its passive investments through funds tracking key indicies such as the FTSE 100.

This involves investments that cannot be actively switched into or out of over a short term period, because tracker funds must buy whatever is in their particular index. And because LGIM is one of the UK’s biggest equity investors, its views in matters of shareholder rights are often ones that are taken seriously.

Sadan said that LGIM had conducted some 250 meetings with companies up to the end of the third quarter of 2011 to discuss the issue of diversity in the boardroom and elsewhere, as well as elicit promises from chairs of boards to engage on the issue.

Sadan cites Imperial Tobacco and Procter & Gamble as examples where analysis of performance suggests there are gains to be made by introducing a different attitude or corporate culture. Imperial has a board with a diverse skill set because of the background of its members, while P&G has done well by ensuring gender diversity.

Sadan referenced one study suggesting that “companies with more women on their boards were found to outperform their rival with a 42% higher return on sales, 66% higher return on invested capital, and 53% higher return on equity.” The ratio of women in management or executive level positions at P&G is 41%, according to data supplied by Sadan.

He added that the example of Imperial shows that this particular facet of corporate governance should not be confused with ethical or other objectives.

By diversifying the people involved, boards can acquire broader sets of skills, which can result in improved decisions, which ultimately can improve the management of businesses.

Diversity is not limited to gender – although this is a key issue being debated in the City of London – but stretches to age, culture, skills and experience. LGIM also takes the view that this is not a simple matter of applying quotas; it should be about finding the best people for the job, who currently may be rejected, as the end objective is about improving companies’ bottom line. It is also important to recognise that there is not one single best way to engage with different companies on the diversification challenge.

Sadan said LGIM was not just looking to improve corporate governance on the issue of diversification, but also to ensure that those companies which have already adopted good practices maintain them going forward.

Sadan said he expected proportionate improvements in levels of diversity at the board level and elsewhere to be seen in the figures for 2011 overall reported by companies in the UK.

 

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