As we enter proxy season, all eyes are on corporate boards. Will they embrace openness and diversity? Or will they resist the growing chorus for more democratic director elections?
A good indication will be their responses to proposals for proxy access, which enables shareholders to nominate board candidates. TIAA-CREF believes proxy access is imperative for creating long-term shareholder value.
Board elections are often insular affairs that discourage new perspectives and director turnover. For years, shareholders have sought change, fighting for the right to place candidates on management ballots. The goal is boards that comprise top-quality directors representing a variety of viewpoints, including those of large shareholders.
Proxy access improves board quality, accountability and communication with investors. Even though it is rarely invoked, the mere existence of proxy access encourages productive discussions between directors and investors about board composition.
Proxy access also has important business implications. The CFA Institute, the world’s largest association of investment professionals, recently estimated that proxy access could increase U.S. market capitalization in the short term by as much as $140 billion. We believe that would be just the tip of the iceberg.
There’s a clear way forward. The investment community is coalescing around a defunct U.S. Securities and Exchange Commission rule that bestowed proxy access on shareholders owning at least 3 percent of a company’s stock for three years or more. The threshold is low enough to permit a significant number of investors to participate but high enough to exclude those with only short-term interests.
TIAA-CREF recently asked companies whose stock is among our largest 100 holdings to grant proxy access to shareholders that meet the 3 percent and three-year criteria. We are also broadly supportive of efforts like New York City Comptroller Scott Stringer’s initiative to file shareholder petitions with 75 companies calling for proxy access. Stringer has said proxy access is “the (governance) issue for 2015 and beyond.” We agree.
Proxy access is not the only reform needed to enhance openness and inclusion, however. Boards must also make diversity a priority. While we have seen some progress on this front, it’s not enough. Just 19 percent of Fortune 500 board members are women, while only 16 percent are minorities.
Increasing diversity is more than just the right thing to do. It’s also good business. Recent studies have shown that companies with more diverse boards generate higher rates of return on capital.
Much of the discussion about board diversity, particularly in other nations, has focused on mandates or regulatory requirements. These efforts may boost short-term results, but what’s needed is a broad-based system that is effective and can be maintained over the long term. Companies should promote diversity in management and across their entire workforce, not just in the boardroom. That will create a pipeline of heterogeneous talent for producing the corporate leaders – and board members – of the future.
TIAA-CREF is speaking out publicly because we believe strongly in the importance of proxy access and board diversity in promoting shareholder value. For most of our nearly 100-year history, we have engaged in “quiet diplomacy” with our portfolio companies to improve corporate governance. We are proud to raise our voice now in support of openness, inclusiveness and diversity, because we believe stronger, more diverse boards are more accountable to shareholders and generate better performance.
It all comes back to the mission we were given at our founding: to manage our clients’ money in a way that helps them achieve financial security. With that in mind, we advocate for proxy access and greater board diversity because they are good for companies, shareholders and, ultimately, the people we serve. It’s that simple.