In the current era of activism, shareholders have significantly stepped up their scrutiny on several key social issues across corporate America. In particular, the spotlight is being cast on gender equality. Gender equality has certainly been a point of focus for companies in recent years with respect to boardroom diversity, the gender pay gap and more.
Shareholder efforts to heighten awareness on these issues are due in part to keeping corporate America aligned with progress made on the societal landscape. Not only should corporate America adequately represent the general population, but investors also view a diverse and equal corporation as one that will maintain long-term business growth.
While some may argue that progress on these initiatives oftentimes meets a stalemate, data indicates that companies are at least making a concerted effort to address these concerns.
Across corporate boardrooms, gender diversity has been an area of concern in corporate governance, due mostly to pressure applied from major institutional investors. The most recent Equilar Gender Diversity Index (GDI)—a quarterly index that measures progress towards gender parity on Russell 3000 boards—revealed that progress is indeed being seen on this front. According to the GDI, more than one-third of new director seats at Russell 3000 companies went to women in Q2 2018 (Graph 1). The study also revealed that the overall percentage of women on Russell 3000 boards reached 17.7% in that same quarter.
2017 became a banner year for shareholder engagement around gender diversity on boards, beginning with State Street’s “Fearless Girl” statue of a young woman facing off with the Wall Street Bull to bring awareness to gender diversity.
The gesture was well-regarded, even winning a major advertising award, but State Street also put its pen to paper and voted against hundreds of directors on boards that did not have women. Subsequently, BlackRock voted in favor of several shareholder proposals that requested more disclosure around diversity in 2017. In 2018, the investor sent letters to all Russell 1000 companies that had fewer than two women on their boards.
“We believe that a lack of diversity on the board undermines its ability to make effective strategic decisions,” the BlackRock letter said, which was signed by Michelle Edkins, Global Head of Investment Stewardship.
Companies are becoming more proactive in disclosing their efforts for diversity.
While progress has been made with regards to boardroom diversity, there is still a long way to go before gender parity is reached on Russell 3000 boards. The fact remains that women still hold just over one in six board seats.
While there is not a consistent method for companies to disclose this information, companies are becoming more proactive in disclosing their efforts for diversity. According to a 2017 Equilar report, Board Composition and Director Recruiting Trends, featuring commentary from KPMG’s Board Leadership Center and Semler Brossy Consulting Group, in 2017, approximately 40% of the Equilar 500—the 500 largest U.S. public companies by revenue—disclosed specific details in proxy statements about their board diversity representation. Just over 45% of companies disclosed composition with respect to gender, and 39.8% of companies disclosed diversity in terms of ethnicity or race (Figure 1).
When broken down by industry sector, the industrial goods sector was unique in the fact that half of companies disclosed gender diversity in board composition (Graph 2). Industrial goods companies were also the second-most prevalent to disclose ethnic and racial diversity, trailing healthcare by a small margin. Meanwhile, the basic materials sector—which includes energy and oil & gas companies—was the least likely to disclose any form of diversity.
“There is no sign that investor interest in board diversity is going away any time soon, in fact the signs are that it will continue to increase,” said Susan Angele, Senior Advisor of Board Governance at KPMG’s Board Leadership Center. “Diversity is not a once and done exercise—insisting on a diverse pool of highly qualified candidates for future board searches can increase the diversity of perspective in the boardroom and continue to add value as a matter of continuous improvement.”
Investors will continue to scrutinize boards for their lack of diversity, however signs do indicate that companies are at least beginning to listen.
Over the last few years, investors have paid closer attention to the pay gap and advocated for gender equity. There have been several high-profile shareholder proposals targeted at narrowing the gender pay gap, including at Alphabet and Starbucks. Of course, this means all levels of an organization will be examined, including the C-suite.
Executive pay has regularly been under the microscope, particularly in light of the introduction of Say on Pay in 2011. The degree to which shareholders hold boards accountable for their executive pay decisions is the highest it has ever been. Say on Pay in combination with the new CEO pay ratio disclosure requirement is primarily responsible for executive pay garnering so much attention from shareholders, customers and the media over the years.
In general, executive pay can be analyzed from multiple different angles with respect to components. However, dissecting the breakdown of executive pay by gender paints an interesting picture.
A 2018 Equilar study examined the gender pay equity ratio of specific executive levels. Equilar calculated the ratio by analyzing the total compensation (base salary paid, incentive awards valued at target and grant date fair value of equity awards) received by male and female executives, particularly those who occupy the positions of chief executive officer, chief financial officer, human resources executive and general counsel at companies classified in the Russell 3000 over the last three years.
At the CEO level, the gender pay gap is exceptionally small, favoring women in the last two years (Graph 3). In 2015, the median male CEO earned approximately 1% more than the median female CEO, while in 2016 the gap reversed with female CEOs earning approximately 3% more than their male counterparts. In 2017, the gap increased further in favor of women, with female chief executives making 6.3% more than the median male CEO. However, these statistics should be viewed with caution due to the vast difference in the sample size between female and male CEOs. In 2017 there were 135 female CEOs, leading to a more volatile median number in terms of total compensation for females.
The position of CEO was indeed an outlier in this study. For the role of CFO, men earned consistently more than women from 2015 through 2017, with their pay differential resting at 11.2% in 2017. Human resources executive was the position that witnessed the greatest change in gender pay ratio in the past three years, with the male-to-female pay ratio rising by 28.1 percentage points in favor of men. Between 2015 and 2017, female executives who served as general counsels made less money than men who performed the same job, with the difference rising from 4.3% in 2016 to 7.0% in 2017.
The disparity in gender pay across the C-suite is a definite area of concern for shareholders, but the reasons behind the gap are still unclear. Some may argue that there is innate discrimination against women in the corporate world, and that the lack of opportunity tends to be the status quo.
“Few women make it to those jobs where they’re making hundreds of millions of dollars, so they’re really seen as the exception, rather than the rule, and so that impacts their ability to negotiate,” Anna Beninger, Senior Director of Research at Catalyst, an organization performing research on women and the workplace, told CNN Money. “Moreover, when women do tend to negotiate, they are treated differently than men.”
As corporations address these critical social issues, the pressure will continue to mount from shareholders. 2018 has indeed been a year for shareholders to voice their opinions, and companies should expect greater levels of activism in 2019 and beyond.
Amit Batish is Content Manager at Equilar and the Editor-in-Chief of C-Suite Magazine.