Boards Diversify to Thwart Increasingly Vocal Investors

A major shift toward more demographically and gender diverse boards is underway in corporate America, in part in response to activist investors and in efforts to discourage their approaches.

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Last year, Crown Castle International Corp. (CCI) installed new directors and removed five long-serving incumbents — a major shake-up for the board of the communications REIT.

Three new directors — Tammy Jones, co-founder of a commercial real estate investment firm; Matthew Thornton, a former Fedex Corp. (FDX) freight division COO; and Kevin Stephens, an ex-vice president at Altice USA Inc. (ATUS) — are Black, and one is a woman.

They replace three incumbent male directors — ages 74 to 78 — who held positions at Crown Castle for 15, 26 and 26 years each. Jones, meanwhile, is 56 years old and Thornton is 57. Stephens’ age could not be ascertained though he received a degree in finance and marketing from the University of Michigan in 1984.

In July, two other incumbent directors, Lee Hogan and J. Landis Martin, agreed not to be renominated after Crown Castle said it wouldn’t install outside directors over 72 years of age.

The resignations and new directors emerged shortly after activist Elliott Management Corp. in July began urging the communications REIT to cut investment in fiber, hike dividends, change its board and adjust executive pay plans.

The board shake-up — and director diversification approach — appears to have worked for Crown Castle, for now. Elliott Management doesn’t appear to have submitted director candidates in advance of a now long-passed nomination deadline for a May annual meeting.

The REIT’s changes represent just one example of a major shift underway in corporate America, towards more demographic and gender diversity on boards, both in response to activist investors and in efforts to discourage their approaches.

The transformation is also occurring within the context of broader regulatory efforts at the state and federal level intended to encourage diversity. For example, the Securities and Exchange Commission is reviewing, and expected to approve, a Nasdaq listing rule that requiring member corporations to diversify boards or explain why not.

Jim Rossman, managing director and head of shareholder activism at Lazard Ltd., noted that over the past five to six years there has been a major shift from “pale, male and stale” boards towards diversity that has accelerated rapidly over the past 12 months amidst the Covid-19 pandemic.

According to Lazard, 130 boards at S&P 500 companies in January didn’t have any Black directors, down from 158 boards in September 2020.

“It’s a significant improvement,” Rossman said.

Separately, the number of women directors on corporate boards is also increasing. According to relationship mapping service BoardEx, a sister company to The Deal, all S&P 500 company boards have women directors except one, Monolithic Power Systems Inc. (MPWR). Of the rest, 18 only have one woman on the board while 107 have two, 183 have three, 129 have four, 45 five, 13 six, three with seven and one, Citigroup Inc. (C), has eight.

Women On S&P 500 Boards (Feb 2021)
In addition to hedge fund director contests, corporations also face campaigns from aggressive institutional investors that target corporations with few or no women board members. Rossman noted that any corporation that isn’t working on board diversity in 2021 could find its nomination and governance committee directors subject to “vote-no” campaigns launched by institutional investors.

According to research firm Insightia, the California Public Employees’ Retirement System in 2020 filed nine exempt solicitations against corporate directors in uncontested elections over a lack of board diversity. In March, the pension fund noted it has submitted five shareholder proposals together with some vote-no campaigns targeting board diversity.

Overall, according to Georgeson Inc., shareholders voted on eight shareholder proposals on diversity topics in 2020, and nine in 2019. In addition, 16 and 25 diversity proposals were ultimately withdrawn in 2020 and 2019, respectively, following discussions between investors and corporate leaders on the matter.

“Historically, investors have focused on gender diversity, but recently more investors are now also looking to see more racially and ethnically diverse candidates on boards,” Georgeson managing director Brigid Rosati said. “We will likely see an increase in votes against directors on boards with perceived diversity issues.”

CalPERS, for instance, has voted against roughly 800 directors since 2017 on grounds that board members weren’t responsive enough on diversity issues, managing director Anne Simpson told The Deal.

“We start with a discussion with the company and look at the matrix of director skills,” she said. “If the company does not make a positive response, then we say the nominating committee is failing. If you confine yourself to a demographic minority, that is, Caucasian males over the age of 60, we are not persuaded that that is the best strategy.”

For example, CalPERS in April 2020 filed an exempt solicitation to investors opposing directors at Sonic Automotive Inc. (SAH), which at the time didn’t have any women directors. In August the auto retailer appointed Keri Kaiser, chief marketing officer of Children’s Health System of Texas and a woman, to its board.

In addition, activist hedge funds are considering board diversity when they evaluate whether to launch a traditional M&A or operations-focused insurgency.

“If a company is vulnerable on economic operations strategy and it has not refreshed the board, you are doubly vulnerable,” Rossman said. “We tell companies to take this [board diversity] issue off the table. You will lose if you are vulnerable on both economic and ESG points.”

By installing new directors and replacing, in particular, over-tenured board members, corporations can focus more effectively on economic issues, he added. “If you haven’t refreshed your board, you might be jeopardizing your ability to get your narrative across on operational issues,” he said. “Investors might say, ‘We get your point on strategy and operations, but your board needs to be changed.’”

The strategy of board diversification appears to have worked for Crown Castle, as it faced Elliott. A move to improve board diversity after an activist has launched a campaign, though, may not always be viewed favorably by investors, who could argue it was just a knee-jerk response to the campaign.

“Don’t wait until the dissident director nominations have been filed,” Rossman said. “Use the time after your annual meeting, the summer and fall ‘offseason’ for proxy voting to focus on refreshment and definitely make the board changes before the nomination window opens up.”

Activists only have leverage in contests if big institutional investors support their efforts. And big index fund managers, particularly, Vanguard Group, State Street Corp. (STT) and BlackRock Inc. (BLK), are all increasingly supportive of board diversity initiatives. Rossman noted that institutional investors and, in particular, the big three index fund managers, ask corporations about their board diversification efforts all the time.

Activists, while still led predominantly by white males, are also increasingly nominating diverse slates of directors. For example, Chris Kiper’s Legion Partners Asset Management LLC in February nominated four dissident directors, including two women and three demographically diverse candidates, for the board of electronic signature and cybersecurity company OneSpan Inc. (OSPN) at a meeting scheduled for June 9. The dissident candidates, including Legion analyst Sagar Gupta, are also generally much younger than the incumbent board and range in age from 33 to 54.

OneSpan may have anticipated the contest. In March 2020, a bit over a year after Legion publicly launched its campaign with a 13D filing, the company installed two women directors — Naureen Hassan, ex-chief digital officer at Morgan Stanley Wealth Management, and Marianne Johnson, chief product officer at Cox Automotive. Hassan, whose parents immigrated from India, had left OneSpan in March to become COO of the Federal Reserve Bank of New York. Currently, OneSpan has two women on its nine-person board.

The concept of companies diversifying boards in response to activist proxy contests isn’t a uniquely American phenomenon.

Kumho Petrochemical Co. Ltd. in South Korea, for example, recently nominated a new five-person slate of incumbent board candidates, including two women, after an activist investor submitted its own diverse slate including two women. Kumho, which currently has no women directors, will have at least two women board members once the contest concludes.

The Kumho situation is unusual in male-dominated Korea, where of the 75 companies with a market cap over $1 billion and tracked by BoardEx, just 26 have women on their board, many with only one or two women as directors.

Overall, corporate boards — in Asia, Europe and the U.S. — that don’t bring in younger demographically and gender diverse directors instead could face additional pressure (piling onto activist campaigns) to divest assets, cancel deals, revise executive pay plans or institute operational changes.

“A diverse board used to be nice to have, but now it is a necessity,” Rossman said.

About the author

Ronald Orol
Senior Editor at | + posts

Ronald Orol leads coverage of activist hedge fund managers, a high-profile group of corporate investors who press for blockbuster deals and were the subject of his book “Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.” Ron produces the Activist Daily and Activist Weekly briefings, which offer exclusives, trend pieces and breaking analysis about insurgent investors and their M&A efforts. Ron also authored “Corporate Governance in the Era of Activism,” a digital handbook for CNBC’s Jim Cramer. He previously worked as a financial regulation and activism reporter at MarketWatch and Dow Jones Newswires.

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