Leverage Point
Influence and Engagement
How are investors using their power to advocate for change in their portfolio companies, whether in public or private markets?
Introduction
In private markets, investor interests can be represented directly as a direct investor, a limited partner, and/or an investor at board director level. While this is not the case for public markets, by filing and voting for shareholder resolutions that demand better impact outcomes, investors can aim to move the dial at publicly listed companies.
Investors can also use documents to shift behaviour: for example, the inclusion of gender lens questions in the annual Tamio survey of impact fund managers in emerging markets, the Collaborative for Frontier Finance survey, the Swiss Sustainable Finance survey, and in numerous due diligence questionnaires, terms on term sheets, and side letters.
While the methods of change may differ, across markets investors are starting to go beyond the typical definition of responsible investing, becoming more intentional about their gender and diversity objectives, and expecting to see demonstrable results.
“Not investing in a company because they don’t have 30% women on their board would be screening out. Screening in is using a set of questions around how a company thinks about diversity on their board as a way to evaluate the business. If a 12 member board has only one woman, by screening in, the investor would then ask the management what their plan is to improve the gender and diversity of their board.”
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“We certainly see a pattern where we are expected to go beyond the characteristics of a good financial institution [ie. having a responsible approach to investing, related to ESG standards], towards more accountability and more demand from our shareholders to actually produce the intended results in the different verticals where we operate.”
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GenderSmart View
It’s one thing to have intentionality behind a gender-smart or JEDI transaction, but challenges often come up in execution. The power of documents such as term sheets and side letters can be wielded here, to help investees move from intention to action and build their own gender-smart capacity. However there is a balance to be struck to not put unnecessary burden on investees or new fund managers, particularly in a private markets context.
Sana Kapadia
Head of Content
Disney shareholders vote for racial and gender pay equity
CASE STUDY
In March 2022, 59% of the shareholders of the Walt Disney Co. voted, by proxy, for a proposal for Racial and Gender Pay Equity. Such a majority vote is a strong call to action. The proposal, brought forth by Arjuna Capital, called on Disney to report on “both median and adjusted pay gaps across race and gender, including associated policy, reputational, competitive, and other operational risks, and risks related to recruiting and retaining diverse talent,” and was filed following allegations of gender pay discrimination and a class action lawsuit.
Arjuna Capital presses companies to disclose pay equity data. In 2021, a pay gap disclosure proposal by Arjuna Capital and Proxy Impact at Microsoft received 40% vote of support, following which Microsoft committed to disclose the data. In the 2022 proxy season, Arjuna Capital has filed/ co-filed seven similar proposals, of which Chipotle, Home Depot and Target have agreed to publish the data in exchange for a withdrawal of the respective proposals.
Pushing for asset manager diversity
Investors are using their engagement with asset managers to signal their gender and diversity priorities but most of them are not yet pressing for specific targets or conditions. However, some stakeholders foresee the possibility of more firmly linking fund manager approval to progress on gender and diversity targets. What’s more, questioning asset managers about the diversity within their own teams pushes investors to consider the make-up of their respective portfolios.
However, this process is not without its challenges. Although more investors are focusing on gender, diversity and inclusion, mainstream investors in particular are early in their journey and shareholder engagement to push for more progressive outcomes is still nascent, especially outside of the US.
“We tell fund managers that for us to invest in them they have to start thinking about gender diversity of their teams; we state this but we do not put a condition on it. That in itself is a step towards changing their investment approach… If they do not meet a request by an investor, their future fundraising can become much more difficult. So this is not a stick, it is a carrot in the future.”
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“As we fundraise for funds, we note that funds have to integrate the 2X Challenge and meet the criteria of the investors, ie. build gender lens and 2X Criteria into their investment thesis, diligence process, pipeline building etc. This has been an interesting observation as some funds that came to us in 2020/2021 without a gender lens as part of their consideration have been given this feedback from the investors and they are definitely taking it into account for their next fund.”
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“We have a framework focused on increasing the diversity of the investment managers. There could be a day where a manager is removed from our approved list if they don’t show progress towards increasing diversity. We are using our influence to shift the landscape [of investment managers] that we work with.”
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“A lot of our impact around gender and JEDI has been influencing fund managers to incorporate gender into the work they’re doing as they invest their capital in communities. Our biggest challenge is that with the market so liquid, it has at times reduced our leverage in influencing the intermediary. Borrowers can find capital with similar economic terms from investors who don’t have gender or impact considerations. We saw this recently with a deal: we asked for some consideration of gender diversity, which was considered too challenging and they focused on raising capital elsewhere, even though it had similar economic terms.”
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“We landed on making climate investments and applying a gender lens, but the investment manager did not come to the table with these ideas. I had to influence them using data and reports. This took a year, but I think that if we influence some investment managers, they will be more effective in influencing others in the space [especially those who have similar backgrounds and ideas].”
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Driving deeper change at portfolio level
More investors in both public and private markets – including those with larger ticket sizes and greater capital allocations – are taking a deliberate approach to gender diversity and demanding more from their portfolios. As well as integrating gender review and corporate policies to influence the composition of boards and leadership teams, they are increasingly interested in pay and broader workforce equity. For example, where portfolio companies are headquartered in states with restricted abortion rights, some investors are specifically asking about HR policies that can support women in their workforce who need access to abortion.
Alongside this, grant providers are moving beyond providing return-seeking capital to support gender equity in their portfolios, as well as the wider ecosystem, in line with their impact objectives on gender and diversity.
Shareholders are also demanding more accountability from their portfolio companies, including transparent reporting of social and environmental performance. Some investors we spoke to expect fund managers to go beyond simply making a narrative case for gender lens investing to actually align the targets with the incentives of the fund. In response, some GPs are aligning at least part of their carried interest to their impact performance. At the same time, clear and accurate data, reporting and transparency are also important to dispel false assumptions, showcase insights and build an evidence base around areas such as the gendered aspects of employee retention.
“Simply adopting specific processes is no longer enough. A lot of our peers want the impact demonstrated, and this, I think, is particularly driven by large ticket investors and capital allocators adopting a more purposeful approach towards gender and going beyond responsible investing. There’s a lot that has certainly taken place over the last five years.”
“The biggest shift we are seeing, after leadership metrics, is on pay equity. We want funds to be advocates through shareholder activism and other activities, and we know that many funds are pushing their holdings and companies on pay equity and other broader workforce metrics and policies.”
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“In our unlisted assets, like private equity, real estate, forestry, agriculture etc. we bring this up (gender and diversity issues) when we do our due diligence and then we follow-up after we decide to invest. It is an important issue to raise, not the least in private equity, so we keep nudging them.”
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“Shareholder activism is going to continue to play a very important role when it comes to bringing gender to the forefront of public corporations, especially given the recent news on abortion rights. More corporations are being pushed to think about gender through the lens of how they are treating female employees and supporting them to access the rights and benefits that they should have.”
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“We have an insider-outsider approach [to influencing corporate behaviour]; we have partners working from the inside to influence board members, investors and companies on green and social resolutions, while we have partners that from the outside are putting together evidence to convince policymakers in the UK to consider equality and justice in the green recovery.”
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“We are seeing some other benefits as we can share information about retention rates with management. People think that women leave to get married and have children, which is certainly true for some, but women are not leaving nearly as quickly as men do to seek other opportunities. These are some rewarding insights that we have been able to show management teams.”
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Ending forced arbitration of sexual assault and harassment
CASE STUDY
In the US, the corporate practice of forcing victims of sexual assault and harassment - disproportionately women of colour - to go through private arbitrations out of court resulted in unintentionally protecting serial harassers. It also meant fewer verdicts in favour of the employees and lower payouts.
In February 2022, the US Senate passed the bipartisan legislation to end the use of forced arbitration for sexual harassment and assault claims. Then, in March 2022, US President Joe Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act. As the legislation is retroactive, following this ruling employees in sexual assault cases cannot be forced into mandatory arbitration, even if they may have previously agreed to it.
This government action was influenced by various stakeholders, including those active in the #MeToo movement, which brought to the forefront the use of non-disclosure agreements in sexual assault allegations. Other stakeholders involved include the investment advisory firm Adasina, who amplified the issue for public markets investors from 2019; investors who supported the campaign with various actions, including signing a support statement; investors like Nia Impact Capital, Rhia Ventures, Clean Yield Asset Management, Whistle Stop Capital and Arjuna Capital, who engaged with companies through shareholder resolutions and engagement to end the practice; and social justice organisations such as Tara Health Foundation, the National Women’s Law Centre, Wallace Global Fund, Movement Strategy Center, the Center for Popular Democracy, the Women’s Foundation of California, and LedBetter, that collected data, publicised the campaign, and pushed companies to drop the practice.
The signing of the legislation is expected to play a major role in changing corporate behaviour and positively impacting gender outcomes.
CASE STUDY
Demanding alignment between corporate values and political giving
In the US, a coalition of investors led by Rhia Ventures has their sights set on aligning a company’s stated value with its political giving. The coalition is advocating for companies with publicly-stated values around lowering their carbon footprint and other environmental issues to not give their political dollars to climate change deniers or organisations undermining messages around climate risk mitigation.
Similarly, the coalition is also advocating for companies that claim to prioritise gender equality at their workplace to not give their political dollars to political entities passing abortion bans and other legislation restricting women’s rights. The coalition files and votes for shareholder resolutions to push for such alignment, routinely securing between 30-50% of shareholder votes in favour of their resolutions.