Not surprisingly based on case-by-case observations of board-focused activism over the years, this new report from the Investor Responsibility Research Center Institute (IRRCi) and ISS: "The Impact of Shareholder Activism on Board Refreshment Trends at S&P 1500 Firms" reveals the adverse impact of shareholder activism on board gender and minority diversity among the S&P 1500 based on an analysis of the 380 new directors (70% dissident nominees/30% activist-targeted board nominees (i.e., activism-responsive)) on those boards that were targeted by activists from 2011 to 2015.
Key findings include:
- Erosion of gender diversity. The number of boards at target companies with at least one female director decreased from 87.1% to 82.8% during a time when the overall corporate trend (and aim) among the S&P 500 was increasing board gender diversity. Less than 10% (just 32 of the 380 total directors) of the new directors were women.
- Erosion of ethic/racial diversity. The number of boards at target companies with at least one minority director decreased from 55.9% to 51.6%. As with gender diversity, the broader corporate trend (and objective) was the opposite. Less than 5% of the new directors were ethnically or racially diverse. More specifically, race/ethnicity information was reportedly available for 351 of the 380 total directors, 335 of whom were Caucasian and 16 of whom were of an ethnic or racial minority.
- Director independence (from management) increased, but lack of independence from activist sponsors is a concern. Although director independence (from management) among target boards increased from 79.5% to 83%, the study revealed concerns about dissident nominees' independence from their activist sponsors - a "sizable minority" of which ISS identified as over-boarded and arguably beholden to their sponsors: "Many of these 'busy' directors appear to be 'go to' nominees for individual activists. The serial nomination of favorite candidates raises questions about the 'independence' of these individuals from their activist sponsors."
- Reduced director age & tenure. The average director age and average tenure on target company boards were 59.6 years and 6.1 years, respectively, compared to director averages of 62.5 years of age and 8.9 years tenure among the broader S&P 1500 in 2015.
Bloomberg notes: "The report didn’t speculate as to why activist action seems to push out women and minorities. But most of the dissidents are white men from the hedge fund industry, and their network of board nominees may come from 'a good old boys network,' said [IRRCi Executive Director] Lukomnik. 'Many activists have repeat nominees and they tend to be non-diverse.'"
As reported last week, board composition-focused activism remains the most predominant activist objective. Furthermore, institutional investors - a number of whom are actively campaigning to improve board gender diversity via their engagement and proxy voting - are also, paradoxically, increasingly engaging and supporting activist campaigns, thus defeating their own objectives and, at the same time, penalizing companies in the voting booth for their lack of diversity. See, e.g., our prior reports and the underlying resources in Company Information here: "Passive Investors Increasingly Influence "Routine" Votes & Activist Campaigns" and here: "Shareholder Activism: Developing an Offensive Strategy" and "Activism Preparation & Response Checklist".