According to a Grassroots® survey from Allianz Global Investors, one of the world’s leading active investment managers, roughly 75% of the 550 IT decision-makers surveyed globally, are expecting their budgets to increase in 2020 compared to the previous year.
Beyond the statue - Why board diversity is important
On March 7 in celebration of International Women’s Day, the 7,000 pound charging bull sculpture, which has reigned alone for 27 years in Lower Manhattan as a potent symbol of Wall Street, woke up to some company. Investment firm State Street Global Advisors (SSGA) had placed the statue of a young girl standing in defiance opposite the bull. “Fearless Girl” was placed to introduce and promote its campaign for increasing the number and role of women in corporate leadership positions.
Beyond the statue - Why board diversity is important
On March 7 in celebration of International Women’s Day, the 7,000 pound charging bull sculpture, which has reigned alone for 27 years in Lower Manhattan as a potent symbol of Wall Street, woke up to some company. Investment firm State Street Global Advisors (SSGA) had placed the statue of a young girl standing in defiance opposite the bull. “Fearless Girl” was placed to introduce and promote its campaign for increasing the number and role of women in corporate leadership positions. This is particularly notable for State Street as the majority of its assets are passive, and large passive managers such as SSGA, Blackrock, and Vanguard have historically been oft-criticised for not taking a more active approach with the enormous amount of shares they own. Intuitively this makes sense as an active manager may sell out of their position if they do not agree with the decisions being made by Corporate Boards and senior management. Passive funds, however, must continue to own the company as long as it resides in the index. Therefore, why not convert that mandatory share ownership into a force for better corporate stewardship and positive long term value!
Passive equity assets under management (AUM), globally, now stands at approximately USD6.5 trillion. As an example, share ownership in Apple, the largest holding in most large cap US and global indices, is dominated by passive equity. Eight of the top ten largest mutual fund/Exchange Traded Fund holders are passive funds, accounting for some 8% of the shares, and institutions with significant passive equity AUM account for almost 18%. As an anecdote, Warren Buffet, via his Berkshire Hathaway investment vehicle, owns approximately 1% of Apple. This is dwarfed by passive giant Vanguard, which owns well over 6%. Clearly, steering such a significant number of AUM toward improving corporate stewardship, and in particular the role of women in corporate leadership is beneficial.
There is a growing body of research pointing to improved long term company performance as Board diversity increases, including work done by Credit Suisse and MSCI. Besides recognizing that having a greater number of alternate views introduced at the Board and senior leadership level should lead to more robust discussion and decision making, women are significantly underrepresented relative to their workforce contributions and purchasing power. For example, in the US, women account for approximately 54% of all professional level jobs and 60% of the college educated workforce. In addition, they drive or are a major factor in roughly 70-80% of consumer spending. These statistics speak volumes as to how any company will most likely see better long term success by having appropriate representation of their own workforce, let alone those that are pulling the levers behind revenue growth.
Due to the exponential increase in the volume and spread of information via social media and other platforms, soon a company’s standing on a variety of ESG issues, including diversity, will be widely available and seen in real time. This creates a powerful branding incentive for a company not to risk their reputation and be forced into a defensive position, even if the company leadership does not believe in the long term value thesis. There may be an economic impact as well given an increasing amount of research indicates that millennials and women, to a growing extent, invest and spend their money based on their values, not just economic rational.
The number of women serving on Boards has improved globally, but there remains significant regional differences and a long way to go on the senior management level. For example, in 2016 women accounted for only 5.3% of Board membership in Japan versus 20% for the US and 27% for Europe. The positive news is the trend has been growing, but even at 27%, Europe looks good on a relative basis, but still has much room to improve for true female representation and diversity.
However, it remains to be seen how involved passive players will be beyond publicity activities. Despite the powerful message and symbolism of Fearless Girl, the actual action SSGA plans to take is a bit vague:
“Our preferred approach is to drive greater board diversity through an active dialogue and engagement with company and board leadership. In the event that companies fail to take action to increase the number of women on their boards, despite our best efforts to actively engage with them, we will use our proxy voting power to effect change — voting against the Chair of the board’s nominating and/or governance committee if necessary”.
In another example of the difficulty in translating good intentions and marketing into concrete action, passive giant Blackrock has made numerous public statements regarding the dangers of climate change. “Investors can no longer ignore climate change. Climate factors have been under-appreciated and under-priced because they have been perceived to be distant [problems],” said Ewen Cameron-Watt, a senior director at BlackRock, in a September 2016 Financial Times article. Yet, Blackrock was called out by several institutional investors for voting against investor led climate resolutions at the annual meetings of ExxonMobil, Occidental and Chevron in 2016 alone.
Active ESG equity managers, such as AllianzGI, have long considered this a key factor in unlocking the long term value to stocks and therefore have incorporated it into a more comprehensive measure of corporate governance and therefore improved ESG efficacy overall. For example, active investors are better equipped to touch on multiple aspects of diversity such as technical expertise, regional backgrounds, industry specific experience, etc. This is on contrast to the simplistic question of “Do you have X% of women on your Board, yes or no?”
In this context, the passive manager response, although welcome, is bit tardy and timid, regardless of intentions. The best way to facilitate rapid change is thoroughly demonstrating to corporate leadership that there is a sacrifice in long term stock price performance, in absolute terms and relative to peers, by avoiding greater leadership diversity. In addition, a more effective tool is moving beyond simple “encouragement” to having an integrated ESG evaluation process that measurably detracts from a firm’s ESG rating for an absence of women in leadership roles and/or no tangible plan for how to improve.
In summary, recognition of and action on ESG related issues by the passive investing giants can only have a positive social impact and will help raise awareness of the importance of leadership diversity amongst corporate Boards and senior managers. It remains to be seen however if these passive investors can move beyond simple verbal statements and publicity acts to join active ESG managers in truly facilitating change.
For more information, read “Beyond the Statue-Why Board Diversity is Important” on allianzgi.com
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. Investments in commodities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes and international economic and political developments. Investments in smaller companies may be more volatile and less liquid than investments in larger companies. Investments in emerging markets may be more volatile than investments in more developed markets. Dividends are not guaranteed. Bonds are subject to interest rate risk and the credit risk of the issuer. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association]; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
2017 RiskMonitor: Geopolitical Concerns Create Risk-Return Conundrum for Investors
Geopolitical tensions are institutional investors’ top concern, according to our new RiskMonitor study. As a result, investors are focusing more on risk management and lowering their return expectations.