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Harriet Steel, Hermes Investment Management

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Increasing numbers of investors searching for diversity, says Hermes

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The number of institutional investors who believe that the gender diversity of the senior management of an investee company is vitally important or important has more than doubled in 12 months.

That’s according to Hermes Investment Management’s second and final paper from its annual Responsible Capitalism survey which reveals that in 2015, only a quarter of investors placed importance on gender diversity, whereas in 2016, a total of 51 per cent of investors agreed.
 
Harriet Steel (pictured), head of business development, Hermes Investment Management, says: “To see the number on investors who place importance of gender diversity leap up by more than double is extremely encouraging and reflective of the high profile campaigns and initiatives introduced to increase gender parity.
 
“In our research we believe that the issue for investors appears to be risk, rather than high returns. Investors are growing increasingly aware of the link between ‘group think’ and poor corporate practice. Boards with more diverse composition tend to challenge senior management, be more innovative and make better decisions. These are febrile times and investors increasingly recognise that certain sorts of risk can fundamentally undermine the performance of their portfolios over time. Worse still, they may be accused of failing in their fiduciary duty.”
 
The survey also showed that despite the gains made in gender, other characteristics of diversity lag behind in investors’ importance, such as race (30 per cent), socio-economic (19 per cent) and educational background (30 per cent).
 
As stated in the ‘Commonsense Principles of Corporate Governance’, recently endorsed by Warren Buffet and others: “Directors should have complementary and diverse skill sets, backgrounds and experiences. Diversity along multiple dimensions is critical to a high-functioning board. Director candidates should be drawn from a rigorously diverse pool.”
 
Steel says: “In the Responsible Capitalism survey it was particularly encouraging to see that only a tiny proportion of investors now consider diversity of board experience (2.1 per cent) and a chairman independent of CEO (1 per cent) to be ‘not important at all’. Given ongoing shareholder concerns over shared CEO/chair roles at companies such as JP Morgan, corporate diversity is no longer being considered a ‘nice to have’, but a necessary part of responsible governance.
 
“Significant political and economic upheaval has prompted governments to look in increasingly greater depth at corporate governance practice. New UK Prime Minister Theresa May immediately took aim at non-executive board members ‘drawn from the same narrow social and professional circles as the executive team’, accusing them of providing insufficient scrutiny. Nineteen nations in the European Union now mandate that employee representatives sit on corporate boards, while US presidential candidate Hillary Clinton has promised corporate governance reform. When diversity considerations draw the attention of policymakers, companies and investors must increasingly take note.”

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