Institutional Shareholder Services, or ISS, the world’s most influential proxy voting advisory service, recently announced that it will no longer consider a board’s gender, racial, or ethnic diversity when making director election recommendations. The decision is a clear abdication to political pressure at the expense of clients and sets a path for intentional financial underperformance – a possible breach of fiduciary duty.
A recommendation for a board director by ISS can increase the probability of a candidate being elected by more than 15%. The new policy ignores the life experience of a director and therefore the aggregate experience of the board as a whole. It’s a significant development as every company should be seeking to optimize long term sustainable growth and reduce material risk for all stakeholders.
When asked about the non-pecuniary change in policy by ISS, Brad Lander, Comptroller of New York City’s $280 billion pension fund, recently told Reuters: “It’s another egregious bending the knee by people who should know better. I can only conclude they’re afraid of increased regulation rather than standing up for independent proxy advice, they are preemptively throwing the value of diverse governance under the bus.”
Currently, 80% of board directors are white men. According to the provocatively named campaign So Many Dicks, “There are 2x more men named Richard, Rich, and Rick than Hispanic women. Black and Asian women barely outnumber men named Dick. There’s 19x more men named Dick than women of Middle Eastern descent. And only 3 Native American women serving on these boards.”
Why should investors care?
According to a 2023 McKinsey study, “…boards with more gender diversity are 27% more likely to outperform less gender diverse boards. And boards with more people of color are 13% more likely to outperform less diverse boards.” According to the Wall Street Journal these key findings add meaningful insight to a growing body of evidence linking financial benefits to a diverse management team, making a clear business and investor case for diversity as a material factor in financial success.
Furthermore, our own data at As You Sow shows that greater diversity in management teams leads to financial outperformance. Our Diversity Benefits report analyzed workplace diversity data from 1,641 publicly traded companies across eight industry sectors over a five-year period. It revealed a statistically significant correlation between higher percentages of BIPOC (Black, Indigenous, and People of Color) management with increases in eight standard financial metrics including: enterprise value growth rate, free cash flow per share, income after tax, long-term growth mean, 10-year price change, mean return on equity (ROE), return on invested capital (ROIC), and 10-year total revenue compound annual growth rate (CAGR).
In retracting its previous policy of considering a board’s gender, racial, or ethnic diversity when making director election recommendations, ISS seems to be intentionally supporting financial under-performance – a problematic position for a proxy advisor to take and one that should force many clients to reconsider all of ISS’s recommendations that seem to shift depending on political winds.
For those who wish to ensure portfolio companies outperform competitors and reduce portfolio risk, there are alternatives to ISS. In 2011, As You Sow started publishing our proxy voting recommendations to help institutional share owners, endowments, and foundations use the power of their proxy to protect their portfolios. Five years ago, we launched As You Vote, which offers voting based on pecuniary factors for both institutional investors and for individuals that aligns with portfolio maximization without hedging to political influence.
Based on overwhelming evidence, As You Sow believes a board requires the most qualified professionals with a broad range of lived experience. That is why our As You Vote policy states that a board composition is ideally 50% women and 40% diverse (non-white male). We vote against candidates and nominating committee members if they do not meet those thresholds.
Now that ISS has abandoned its commitment to offering clients advice that aligns with portfolio maximization, it’s time for responsible investors to find alternatives focused on pecuniary factors. It is our responsibility to use the power of the investments entrusted in us by hard-working Americans to safeguard their long-term returns against a myopic, one-dimensional approach based on a failed economic worldview.
Andrew Behar is the CEO of As You Sow
