NY Times – Companies today earn points for listening to their shareholders and agreeing to change governance practices that are seen as unenlightened or troublesome. But is there a penalty if a company reneges on its promise of change?
The answer, if you are Skechers USA, the footwear manufacturer, is apparently not.
In 2011, at the urging of one of its large shareholders, Skechers said it would start addressing the issue of board diversity by adding a formal policy to its director nomination process. Like the boards of many United States companies, Skechers’ board had no women or members of minorities.
But having given its assurance that it would make a change, Skechers never acted. Three years later, the company’s board still has no policy and is as homogeneous as ever.
While some investors say this is the golden age of shareholder engagement, some company officials who talk the talk when approached on governance issues may then refuse to walk the walk. Even if, like Skechers, they have the shoes.
The continuing problem of homogeneity in corporate boards is a case in point. Despite shareholder efforts to bring more diversity to these posts, women and minorities are still few and far between in the boardroom. These hushed precincts still fit the description given by one governance expert: “male, pale and stale.”
A 2013 study by Catalyst, a nonprofit organization supporting opportunities for women in business, found that women held just 16.9 percent of board seats at Fortune 500 companies last year. That’s up — just barely — from 16.6 percent in 2012. Of the companies, one in 10 had zero female directors, the same ratio as in 2012.
This glacial pace of change, investors say, is not for their lack of trying. They cite efforts at Skechers as well as at Monster Beverage, the energy drink maker, as prime examples of shareholder engagement that has generated only promises.
One such investor is Calstrs, the pension fund that invests on behalf of California’s teachers. In recent years, its officials have pushed for diversity on corporate boards, filing 35 shareholder proposals at companies asking for action on the issue. At least 14 have responded by appointing either a woman or a member of a minority.
Sometimes, as is common among institutional shareholders, Calstrs agrees to withdraw a proposal from proxy materials after extracting a promise from the company to improve its governance practices.
“With all of these companies, we have tried to get them to put something in their charter documents recognizing the need for diversity and giving a vehicle for recognizing its importance,” said Janice Hester-Amey, portfolio manager in the corporate governance group at Calstrs. “Over time we would expect this issue to be addressed.”
That hasn’t always happened.
Three years ago Calstrs approached Skechers about increasing the diversity of its board. After the company agreed to add a formal diversity policy to its nominating committee charter, Calstrs withdrew a proposal that it was hoping to put to a shareholder vote. But Skechers still hasn’t changed its policy.
Back in 2009, Calstrs and Calvert Investments, a mutual fund company, withdrew a similar shareholder proposal at Monster Beverage. Monster had agreed to add diversity to the list of factors to be considered by the group of directors nominating new board candidates.
While Monster did make that change, its board is no more diverse now than it was five years ago. One new director has been appointed since then: Mark J. Hall, a white male who, as chief brand officer, is also a company insider.
Representatives for Monster and Skechers said that their companies are committed to diversity. Roger Pondel, a Monster spokesman, declined to say why the company did not use the opportunity for a new board appointment to increase diversity among its directors.
Jenn Clay, a Skechers spokeswoman, declined to say why the company did not change its charter to include diversity as a goal as it had said it would. She said in a statement that its board is diverse in backgrounds and skills. “We will continue to seek out qualified candidates with diversity in mind as the need arises,” she added. “Our primary focus is on maximizing shareholder value and growing our business globally. We are pleased we just reported our best first quarter in the company’s 22-year history.”
Ms. Clay’s comment has a familiar ring. Companies that reject shareholders’ pleas for improved governance practices often point to a rising stock price or impressive earnings growth as proof that change is unnecessary.
Such a position ignores the possibility, however, that Skechers’ performance might have been even better had its board been less homogeneous. In fact, studies show that companies overseen by at least one woman as a director outperform companies with none.
One recent report from Credit Suisse analyzed 2,360 companies around the world over the six years ended in December 2011. It found that companies with one or more women on their boards generated higher average share prices and better returns on equity during that period than companies with no women as directors. The precise reason for this outcome is unclear.
Some companies are seeing the light on this issue. Those appointing female or minority directors at the urging of Calstrs include QEP Resources, Noble Energy, Quanta Services, Riverbed Technology, the Crane Company and the American Financial Group.
Stu Dalheim vice president for shareholder advocacy at Calvert Investments, said it is concerned about Monster Beverage’s failure to follow through. “We want to institutionalize diversity in the company’s search process,” Mr. Dalheim said in an interview. “We want to have it built into the process, and we think it will ultimately draw better results.”
Monster’s annual shareholder meeting is scheduled for Monday. It will be interesting to see how shareholders vote on a proposal to encourage more diversity on the board.
Thomas P. DiNapoli, the New York State comptroller and overseer of the state’s Common Retirement Fund, said he plans to vote against all Monster directors to protest what he sees as the company’s governance failings, including board homogeneity and entrenched directors. The average tenure of a Monster director is 17 years, its proxy shows.
“Monster Beverage needs to do more than pay lip service to nominating a woman to its board of directors,” Mr. DiNapoli said in a statement. “When directors ignore their commitment to shareholders on something as simple as board diversity, it’s a sign of an entrenched board and a red flag that there may be other governance problems.”
Monster and Skechers stand out as clear examples of companies that have not fulfilled promises made to shareholders on governance issues. It’s not clear how many others there are, because such cases aren’t tracked. Amy Borrus, deputy director of the Council of Institutional Investors, says she hopes that the situations are rare.
“If they do occur, it seems safe to assume they sow mistrust,” she added. “Shareholders don’t appreciate broken promises.”
By GRETCHEN MORGENSON
Posted on May 31, 2014
NY Times | Not Walking the Walk on Board Diversity