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The UK’s biggest fund manager, Legal & General Investment Management (LGIM), has warned FTSE 100 companies with an all-white board that they will be voted against if they do not have a Black, Asian or minority ethnic (BAME) board director by 2022. In such circumstances, LGIM will vote against the re-election of their chairman or the head of their nomination committee and have commented that ‘For companies that fail to meet our transparent and rules-based minimum expectations, there will be voting and investment consequences.’ The fund manager has also written to the bosses of S&P 500 companies in the US expressing the same expectation by January 2022.
In an effort to encourage ethnically diverse boards, LGIM released an Investment Stewardship Diversity Plan 2020 in September, where it had initially expressed its intentions. In this plan, LGIM disclosed that it had responded to the 2020 Parker Review, which set a recommended target for all FTSE 100 companies to have at least one director of colour by 2021 and by 2024 for the FTSE 250. In addition, the fund manager acknowledged that investors have a responsibility ‘to demand more transparent disclosure on ethnic diversity, require explicit policies on ethnic diversity and inclusion, and hold companies accountable for these policies’. In doing so, LGIM further expressed support for the UK’s Financial Reporting Council’s expectation of improved reporting on ethnic diversity in line with the UK Corporate Governance (UKCG) code. Principle J of the UKCG code states ‘Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.’ As a firm which manages over £1.2 trillion of assets and owns 2-3% of almost all the largest stocks in the UK, LGIM’s support on this front is significant in promoting ethnic board diversity.
The motivation behind the ethnic diversity plan was highlighted by ‘The horrifying killing of George Floyd and so many others [which] has led many institutional investors to think much more seriously about structural racism and inequality.’ LGIM went on to explain ‘Our expectation is that companies set ambitions related to the ethnic composition of their organisation, throughout the workforce, with a particular emphasis at the board level, which generally sets the tone from the top’. In a similar vein, the Change the Race Ratio campaign was launched last week, to increase ethnic minority participation in British businesses, increasing the pressure on companies to improve ethnic diversity.
Progress towards ethnic diversity in the workplace has been widely recognised as a slow process. The Parker Review highlighted that in 2020, 37% of FTSE 100 companies had no ethnic minority representation on their boards (down from 50% in 2017). When the Black Lives Matters movement launched earlier this year, the issue of racial inequality came under the spotlight, forcing the UK government to be more proactive in its approach. This led to the creation of the Commission on Race and Ethnic Disparities in June 2020, the sub-group priorities of which were set out in September. Ethnicity issues appear to now be ripe for wide-scale reform. In June of this year, Baroness McGregor-Smith, president of the British Chambers of Commerce, urged the government to act on ethnicity-related pay disparity, emphasising ‘The big gap is ethnicity pay reporting . . . and that needs to change’, following her review in 2017.
LGIM’s Head of Retail Multi-Asset Funds has stated that ‘Too often firms remain trapped in the enquiry and listening stage rather than implementing recommendations that arise from them…The problems faced by Black aspiring professionals are not new, but have rarely been widely understood or acted upon, and right now we have an opportunity to change that.’ With the Parker Review deadline fast approaching for FTSE 100 companies and investors adopting an increasingly activist stance, will this be enough to ensure faster progress towards greater ethnic diversity? Market Tracker has been conducting research on the progress towards ethnic diversity in the boardroom and annual reporting, and will explore the topic further in an upcoming Trend Report later this year.
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Market Tracker is a unique service for corporate lawyers housed within Lexis®PSL Corporate. It features a powerful transaction data analysis tool for accessing, analysing and comparing the specific features of corporate transactions, with a comprehensive and searchable library of deal documentation across 14 different deal types. The Market Tracker product also includes news and analysis of key corporate deals and activity and in-depth analysis of recent trends in corporate transactions.
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