Theme in focus: Board and management diversity

Why did we engage? 
Case study 1 is a German multi-national food retailer held in our equity and fixed income strategies. We believed improved diversity at both the board and management levels, and in particular an increase in the proportion of women, would benefit the company and its long-term performance.

How did we engage? 
We engaged with the company to understand its board dynamics and sustainability program. We asked the company whether, as a retailer with a diversified customer base, it had an appropriate gender balance on its board. We were interested to find out if the board was expanding its search to source candidates. Finally, we wanted to know how the company was addressing the lack of diversity in the management team.

Outcome
We believe the company has made improvements on diversity and is traveling on a positive trajectory. In Germany, by law, the supervisory boards of certain large corporations are composed of 10 shareholder-elected members and 10 employee representatives. The supervisory board oversees and appoints the members of the management board and must approve major business decisions. The company’s supervisory board set an objective to have at least one female on the management board by June 2022. The company has targeted 20% women in its tier 1 management level and 35% within its tier 2 management level.

To establish a diverse and inclusive corporate culture and gain better access to more talent, it has developed a company-wide diversity approach. The company wants an open working environment in which individual differences are respected, valued and encouraged, as it believes diversity and inclusion lead to better business results. It has established a dedicated contact person for its diversity and inclusion strategy, which is monitored by the board, using key performance indicators.

We believe the company has embedded its diversity and inclusion strategy within its culture, and this has acted as a catalyst to promote further diversity on the management board. We believe diversity in senior management will help the company better address the needs and concerns of a diversified customer and employee base, thus putting it in a better position to deliver better long-term value.

Next steps
We will continue to engage with the company on governance and its broader sustainability program.

Theme in focus: Board and management diversity

Why did we engage?
The second case study is a Japan-headquartered company that specializes in human resources and employee services. We started to engage with the company to discuss gender diversity because its board had no female director.

We believe boards have a responsibility to reflect the interest of all company stakeholders, and recruiting them from diverse backgrounds is a fundamental part of strengthening a business. However, boards in Japan fall far behind their global peers on gender diversity. As of August 2020, only 6% of the directors of listed Japanese companies were women.

As the company creates its value by connecting people all over the world, we felt a diverse voice on the board was vital to its continued growth.

How did we engage?
In our engagement with the company, we recommended female representation on the board. We said that while the nomination of female executive directors is still rare in Japan, companies should take adequate steps to promote gender diversity within their organizations.

The company explained it was seeking female board representation among its existing staff. We discussed how Japanese companies are increasingly appointing female directors from outside the organization, often from pools of academics, accountants and lawyers.

Outcome
The company nominated an internal female director, and we subsequently encouraged it to further enrich its internal pool of female candidates, as well as take diversity into consideration from various angles.

The company emphasized that it places value on diversity, not only in terms of gender but also in ethnicity and across age, which we welcome. The company’s efforts to increase the number of female managers is not limited to regular, ongoing initiatives to develop internal resources. It also has a special program to promote talent, providing employees with opportunities to take on a new challenge outside their career path and conduct a fair evaluation of their accomplishments. These improvements allowed the board to appoint a young female director.

Next steps
We will continue to monitor board diversity and will keep engaging with the company.

Theme in focus: Capital allocation

Why did we engage?
This U.S.-based company proposed to make a significant acquisition, which raised our concerns around social, regulatory and governance risks. Given the very public nature of these ESG concerns, we expected the board to have taken them into account before approving this deal. As these risks unfolded, the acquisition fell well short of targets, which led to a multi-billion-dollar write-down to the original investment. We were disappointed by the lack of board oversight. We expect boards to conduct due diligence on mergers and acquisitions, employ their expertise in understanding ESG risks and challenge management’s assumptions around them.

How did we engage?
The deal, and the almost immediate fallout, validated our concerns. JPMAM voted against the reelection of several board members to reflect our concerns around M&A due diligence. We also voted against executive compensation, as we believed there had been a lack of management accountability.

We engaged with senior officers and the company’s board, before and after the annual meeting, explaining the rationale behind our decisions. We encouraged the board to enhance its oversight around M&A due diligence and provide more disclosure of the risks to the process.

Next steps
We will monitor the company’s disclosures in its upcoming proxy statement. In particular, we will monitor how the board has responded to investor concern on executive remuneration to ensure executives are held accountable for capital allocation decisions.

Theme in focus: Capital allocation

Why did we engage? 
We were concerned with this company’s assumption of significant legal liability arising from the use of controversial chemicals by a business it acquired.

How did we engage? 
In 2019, we voted against releasing directors from their liability for the policies the company pursued during the 2018 financial year. This formally signaled our disapproval with the board and its actions. Our stewardship team then continued to engage with senior management, which undertook several roadshows to meet and listen to a range of shareholders’ views.

Outcome 

The company has taken several steps to restore investor trust and confidence in the board. The supervisory board agreed to a voluntary special audit of due diligence procedures for evaluating major M&A transactions. The company has also taken a more serious stance on addressing sustainability as a long-term issue, with its board chair now the company’s chief sustainability officer and responsible for achieving its ambitious targets by 2030. 

Changes to the board's leadership, along with the addition of new directors, has resorted our confidence. The board has also been strengthened by the appointment of a director who has expertise in the company’s specific field. A skills matrix will inform its ongoing board refreshment process going forward. 

The company has redesigned its remuneration system to reduce complexity and better align with its go-forward strategy, which includes incorporating sustainability factors. A clawback mechanism has been introduced that forces board members to pay damages if they breach their duties. Additionally, the CEO is now required to hold shares for two years beyond service.