Women on boards: How a bank's threat could accelerate change

23 January 2020, 16:45 | Updated: 23 January 2020, 17:46

Diversity in boardrooms is far from being achieved.

In the UK, while the Hampton-Alexander review - a body aiming to raise the number of women on boards of FTSE-350 companies - has reported progress is being made, its latest assessment said 175 top companies remain "well adrift" of the government-backed target for at least a third of executive positions to be filled by women by the end of this year.

In the United States, meanwhile, things are even worse. Women account for just one in five boardroom seats across the 3,000 largest publicly traded companies.

Non-white people remain similarly under-represented in European and US boardrooms.

The Parker review, which seeks to improve ethnic diversity on UK boards, reported in 2018 that, of the 1,048 directors in the FTSE-100, just 84 come from black, Asian and minority ethnic backgrounds.

So an announcement on Thursday from Goldman Sachs, one of Wall Street's most powerful investment banks, could prove significant in changing the situation.

David Solomon, chief executive of Goldman Sachs, said that, as from the end of June this year, the bank would no longer work on the stock market flotations of companies in Europe or the United States unless they have at least one woman or non-white person on their board at the time of their IPO.

This will be raised to two in June next year.

Speaking in Davos to CNBC, sister channel to Sky News, Mr Solomon said: "I look back at IPOs over the last four years and the performance of IPOs, [where there's] been a woman on the board, in the US is significantly better than the performance of IPOs where there hasn't been a woman on the board.

"So, starting on 1 July in the US and Europe, we're not going to take a company public unless there's at least one diverse board candidate, with a focus on women, and we're going to move toward 2021 requesting two.

"We realise that this is a small step but a step in a direction of saying, you know what, we think this is right. We think it's the right advice and we're in a position also because of our network to help our clients if they need help placing women on boards.

"And so this is an example of our saying how can we do something that we think, you know, is right and helps move the market forward."

Mr Solomon said it would not be possible to introduce the new targets immediately because it was already working on a number of stock market flotations. He said, for those companies, the bank would work with them to improve their diversity representation before the IPO or as close as possible to it afterwards.

He added: "We might lose some business but, in the long run, this is the best advice for companies that want to drive premium returns for their shareholders over time."

Goldman is the first of the major Wall Street investment banking firms to take such a stance. It also potentially opens a gulf between Goldman and some of its competitors.

Earlier this week, Mike Corbat, the chief executive of Citi, insisted that it was not for banks to be responsible for companies or their environmental, governmental and social policies.

He told a meeting at Davos: "I don't want to have to be the one telling [companies] or enforcing standards in an industry or business.

"We don't want to find ourselves being the person that dictates winners and losers. A bank's job is to support the communities in which it operates. It is not to dictate outcomes."

Mr Solomon, too, has said Goldman will not stop raising money for fossil fuel companies - although it is also seeking to finance, invest in or advise on $750m worth of activities supporting the transition away from carbon-intensive practices or on what he called "inclusive growth".

But he insisted that taking a stand on diversity was different because it would help raise returns for the shareholders of clients.

He added: "I'm a big believer that, unless you take care of your stakeholders more broadly in the medium and long-term, you won't deliver outstanding returns.

"I think from a governance perspective, diversity on boards is a very, very important issue. We have been very, very focused on it. So we're trying to find ways to encourage that.

"I come from a position of my own experience where I look at the Goldman Sachs board. We have four women out of 11, a black lead director and I really value the diverse perspectives I'm getting which are helping me run the company."

He pointed out that, during the last two years, more than 60 US and European companies had floated on the stock market without any female board members while more than 100 had gone public with only one female board member.

It remains to be seen whether Goldman's stance will deter some companies from seeking its advice when coming to market. However, as one of the world's best-connected banks, institutional investors do get behind a company when Goldman is bringing it to market.

That makes it a natural choice for a lot of businesses seeking to go public.

Big global IPOs on which Goldman has worked during the last 18 months include those of Slack, Uber, Dropbox and Saudi Aramco as well as the abortive flotation of WeWork.

Goldman's move may surprise some of its critics. As arguably Wall Street's most famous investment bank, although by no means its biggest or most profitable, it became a popular target for those angry with bankers in the wake of the financial crisis.

Yet today's announcement is not the first time the bank has put its money where its mouth is.

In 2018, it began a scheme called Launch With GS, a $500m commitment to invest in or support women-led companies and investment managers.

It will be fascinating to see whether the bank's competitors follow this latest initiative - and, indeed, whether the bank falls down the closely-watched adviser rankings if it has to turn away some business.