It used to be that only activist shareholders paid attention to board diversity. But today, the issue has also caught the attention of regulators: on Oct. 5, CSA published its third review on the status of corporate diversity when it comes to Canadian non-venture issuers.
There’s also an investment reason to look at board composition.
“The board has a fairly significant effect on long-term strategic decisions of the company, and we want to ensure we have boards that are aligned with our interests,” says Colum McKinley, vice-president of Canadian equities at CIBC Asset Management, and a manager of the Renaissance Canadian Core Value fund. “There’s a number of components that go into that, [including] board diversity.”
Why does diversity matter? “In individual businesses and in boards, diversity of views and perspectives brings more ideas and better ideas to the table,” he says.
In particular, McKinley looks for directors who have industry knowledge, business acumen and “an owner or entrepreneurial mentality.”
McKinley says his team meets with boards regularly “to share our views on where we think they’re doing a great job, and where there are opportunities for continued improvement. We have the benefit of being [a] large shareholder in many of the companies we own, […] so we’re constantly striving for and pushing for boards that are more effectively aligned with us as investors, and ultimately with our unitholders.”
The proof, for him, is in board decisions.
“We can look at [board performance] relative to the hurdles that they set for themselves and the management team,” McKinley says. He also looks at strategic decisions like acquisitions, “and we can measure the return on that invested capital over time,” he adds.
The basics of checking board composition
Publicly traded companies file information about their boards with the regulatory bodies. In Canada, this information is archived in the System for Electronic Document Analysis and Retrieval (SEDAR).
Board composition is typically detailed in a firm’s Management Information Circular, released in advance of its annual general meeting.
The circular usually contains director nominees and, for each, their:
- job title and/or bio;
- status as an independent or related director;
- committee membership;
- number of other directorships, and where;
- duration of service;
- key skills, often displayed in a matrix format to show which skills overlap among directors and which skills are unique;
- meeting attendance record;
- compensation; and
- share ownership.
Circulars also include the previous year’s committee reports, which offer insight into company directors’ decision-making and what they thought of management’s actions.
A relatively new addition to circulars in Canada is information about gender diversity, as per National Instrument 58-101 Disclosure of Corporate Governance Practices. This instrument requires issuers to disclose diversity-related information such as the number and percentage of female directors and executives, and its related policies (if they don’t, they must explain why).
“Diversity across all spectrums is very important, and we’re working with that framework in context of [a] broader skills matrix,” says McKinley. “It’s a balance, but we do think there are substantial opportunities for boards to pursue a greater diversity representation […] and we think there are benefits to that when we see it come through in companies.”
Circulars, too, are starting to voluntarily acknowledge markers of diversity beyond age, geography, skills and gender. Looking at the top 10 TSX firms by market cap, all but one specifically mentioned that their policies consider director/executive ethnicity. Meanwhile, two top-10 firms specifically mentioned that their policies consider directors and executives with disabilities, while two other top-10 firms mentioned disabilities in the context of general recruitment.
For McKinley, policies are nice but it’s director action that matters–across all factors.
“Our job is to assess […] information through a very critical lens, so we take nothing at face value,” he says. “We always look for ways to take an outside view that will confirm or deny what we’re being presented.”