Mark Machin is CEO, Canada Pension Plan Investment Board
While there’s much talk about companies bringing broader perspective to the boardroom, it’s not consistently accompanied by action.
And if companies don’t take the required action to achieve the board effectiveness that today’s business environment requires, it falls to investors to provide a nudge and, when necessary, a push.
Corporate governance matters, and as chief executive of the Canada Pension Plan Investment Board, I believe it’s crucial for companies in which we invest capital to assemble boards that reflect the full range of talent available.
CPPIB is committed to urging those companies to rigorously evaluate their directors, including their gender makeup. We believe companies with diverse boards are more likely to achieve superior financial performance. Research from Credit Suisse and Catalyst Inc. has shown that companies with higher female representation have delivered higher returns.
That’s why CPPIB’s Sustainable Investing team this past year added Board Effectiveness as a fifth area of focus, joining Climate Change, Water, Human Rights and Executive Compensation.
The choice was natural, since we see effective boards as critical to the sustainability of our investee companies’ value and are using our voting power to influence boards.
In the 2017 proxy voting season, we leveraged our votes at the shareholder meetings of 45 Canadian companies with no female directors to demonstrate our desire for improved diversity. A year later, nearly half of those companies had added a female director.
Likewise, during the same period in 2018, we voted at 22 Canadian public company shareholder meetings with no female directors. Although we’d made efforts to work with these companies, we did end up voting against the nominating committee chair at six companies and against the entire nominating committee at seven.
We don’t take such actions lightly. Our 2018 Proxy Voting Principles and Guidelines establish expectations that boards consider diversity, as well as our voting approach should actions fall short.
We expect each company to use a meaningful, robust skills matrix as part of a deliberate process to evaluate whether they have the right mix. And we ask tough questions about how they’re making this happen.
Research and regulatory reviews of boards at major listed companies show women currently represent about 22 per cent of directors, and that even if the rate at which women are joining boards doubles it still will take decades to reach parity.
In part, that’s because boards are refreshing slowly – and getting older. These are barriers to gender diversity that can also hamper evolution of thinking and a company’s ability to adapt to emerging risks.
Meaningful change requires identifying future needs by asking pointed questions: How is the world changing? How is the business changing? How are the risks changing? Do we truly understand our stakeholders’ needs or thinking?
And, most importantly: Do we have directors who understand these dynamics, and if not, how and where will we find them?
We pride ourselves on being patient, and take the long view on the $366.6-billion CPPIB invests and oversees. Yet, patient as we are, we grow restless about the slow pace of change.
We want to see companies commit to following up on gaps identified through our evaluations of directors and boards, and to renew their boards with directors who bring needed skills.
Further, we will continue monitoring developments in female director representation at our investee companies and commend those that take steps to professionalize their director search processes and appoint female directors.
By signalling that board effectiveness is a core topic of engagement for us, CPPIB urges other large institutional investors to send similar messages that they, too, believe the pace of change must accelerate.
Our goal is to impress upon all companies, particularly those desiring capital and expertise from CPPIB and its peer institutions, to examine ways to improve their boards and actively make gender diversity a part of that process.
That would make for refreshing change.