As women remain vastly underrepresented in corporate leadership, gender diversity has rightly become a major issue for responsible investors. The latest data from the Canadian Securities Administrators (CSA) show that women hold only 15% of board seats and 4% of CEO positions at publicly traded companies in Canada.
At industry events and companies’ annual meetings, it is now common to hear investors raising concerns over gender issues such as the lack of women in corporate leadership. For example, in May of this year, a shareholder proposal asking Waste Connections Inc. to step up its gender diversity efforts received a record-setting 64% support from shareholders.
The growing investor interest in diversity has even led to the launch of numerous thematic funds and indices that are focused on women-led companies.
But, of course, diversity goes beyond gender. So, why are we not seeing more events, shareholder proposals and investment products dedicated to themes such as race, ethnicity, sexual orientation and other forms of diversity?
The answer is certainly not a lack of interest. Prior to the 2019 proxy season, a majority of institutional investors (53%) surveyed by EY said that board diversity “primarily inclusive of gender, race and ethnicity” should be a top focus for boards of directors in 2019. This figure increased from one-third in 2016, signalling that interest in broader diversity themes is on the rise.
And although the “business case” for diversity should not matter in this day and age, it’s worth noting that a 2018 McKinsey report found that companies in the top quartile on ethnic and cultural diversity were 33% more likely to experience above-average profitability than their peers who ranked in the bottom quartile. Diversity is simply good for business.
Data challenges
So, what explains the limited investor activity on race, ethnicity and other forms of diversity, in contrast to the myriad investor activity on gender? While numerous factors may be at play, a lack of data is definitely one part of the problem.
Part of the reason we’re seeing so much investor activity on gender is that there is useful data available to support such efforts. In 2014, the CSA introduced a regulation requiring corporate issuers to disclose the gender of directors and senior managers. Although progress toward gender parity has been slow, the data produced by this regulation has enabled investors to measure companies’ progress, which is helpful for investment decisions and voting activities. In a report on the 2019 proxy season, governance consultancy Hugessen noted that discussions around diversity are a “fixture of boardroom agendas.”
To date, there have been no such disclosure requirements for other forms of diversity beyond gender. As a result, there are no publicly available statistics tracking a broader spectrum of diversity in corporate leadership. This has made it difficult, if not impossible, for investors to engage with companies and to measure their performance on a broader range of diversity indicators. But, thankfully, that is changing.
Diversity data on the horizon
On Jan. 1, 2020, publicly traded companies governed by the Canada Business Corporations Act (CBCA) will be required to disclose their policies and practices related to diversity on their boards of directors and within senior management, including the proportions of women, Aboriginal peoples, people with disabilities and members of visible minorities. Canada will be the first jurisdiction in the world to mandate disclosure of specific diversity characteristics in addition to gender.
Notably, this regulation will apply to all federally incorporated companies with publicly traded securities, including venture issuers that are not subject to the CSA’s gender disclosure requirements. According to Osler, this means some 250 small-cap companies listed on the TSX Venture Exchange will now be subject to the CBCA’s diversity disclosure obligations.
These new disclosure requirements will provide responsible investors with a wealth of new data, which can be used to help identify corporate diversity leaders and laggards. This data will also be invaluable for active owners who wish to engage with their portfolio companies to improve their diversity performance.
Limitations and opportunities
While the new diversity disclosures will position Canada as a global leader, they are not without limitations.
First, the regulation does not cover important diversity characteristics such as sexual orientation and age. It is worth noting that this type of data may be challenging to collect as people may be rightly concerned that their information could be used to discriminate against them. But the same could be said about gender and race – so, widening the scope of the disclosure requirements is more than possible. The key is to establish controls to ensure that persons within these designated groups are insulated from potential discrimination or other misuse of such personal information.
Second, the CBCA regulation will apply only to boards of directors and senior management positions. There is some debate about whether diversity “trickles down” to the rank and file. On this front, the market has been stepping in to fill some gaps.
For example, a Toronto-based start-up called Diversio works with corporate clients to “diagnose” their diversity and inclusion efforts by collecting anonymized demographic data from employees who may not be comfortable sharing such information with their employer. Diversio then provides the aggregated data to the corporate client, which they use to benchmark against peers and track their progress over time. Solutions like this are a welcome addition to the market, as investors and companies increasingly recognize the value of a diverse and inclusive workplace.
Although the new federal regulation falls short on some important diversity indicators, it represents a meaningful step forward. Canada is positioned to be a global leader on diversity disclosures, and responsible investors will have a broader range of diversity data to support investment decisions, proxy voting and shareholder engagement activities.