Maintaining a strong, diverse and balanced board requires continuous planning. This is an important responsibility of the board and its nomination committee. It is vital that the board should remain well balanced over time. A balanced composition allows it to adapt to the changing demands of the business environment and ensures that it can fulfil its role in driving sustainable corporate performance. We engage with companies when we identify imbalances in board and committee composition. An imbalance may be symptomatic of weakness in the nomination and succession planning process. Over time, this weakness can reduce the effectiveness of the board’s leadership. The goal of our engagement is to support companies to improve their board composition and to become better investments for our clients.
Maintaining a strong, diverse and balanced board requires continuous planning
We are wary of the unintended consequences that can arise when boards and investors have a myopic focus on a single issue. Boards must carefully consider all aspects of board composition in their succession planning in order to meet the expectations of investors, listing authorities, regulators and other stakeholders. They must also take care to ensure the smooth transfer of responsibilities as their composition evolves to meet these expectations.
The following case study shows how we engaged with a company to highlight these issues and to encourage greater diversity and balance in its board composition. It demonstrates the importance of strong succession planning and the challenges that arise when board composition does not evolve in line with market expectations.
Case study – Logo Yazilim Sanayi ve Ticaret (Logo)
Logo develops a range of software solutions for businesses, including enterprise resource planning products. The company is based in Turkey and has business partners in several other countries.
We met the company in early 2022 and had subsequent engagements prior to its annual general meeting (AGM) in April. We discussed a range of social and corporate governance matters with the company, but a key focus was board composition and succession planning.
Avoiding key-man risk
Prior to Logo’s 2022 AGM, four of the five board committees were chaired by a single independent director. In our view, this gave one individual too much responsibility for governance and oversight functions. It created a key-man risk and potentially threatened the rigour of board oversight. In order to address this, we encouraged Logo to distribute committee chairman roles more evenly among appropriately qualified independent non-executive directors.
Setting gender diversity targets
In emerging markets, board gender diversity can lag behind the levels seen in some more developed markets. In its latest progress report on board gender diversity, MSCI found that 26.4% of companies in its Emerging Markets Index had no female board members. In order to encourage progress in this area, we wrote to our emerging market holdings, including Logo, to explain our expectation that boards meet a minimum standard of having at least one female director.
Prior to the 2022 AGM, the company’s board was composed entirely of male directors. This did not reflect the wider workforce, where gender diversity is much more balanced. Women account for in excess of 40% of staff overall, including at the executive management level. Such diversity is particularly notable for a company operating in the software sector. Logo adopted a 25% board gender diversity target several years ago, in response to a market-wide communication from the Turkish Capital Markets Board. We were disappointed that there had been no progress towards achieving this target. This added to our concerns about the transparency and efficacy of the nomination and succession planning process.
Engagement encourages change but concerns remain
At the 2022 AGM, we were pleased that our gender diversity expectations had been addressed, but we were disappointed that our concerns regarding key-man risk had come to fruition. While board gender diversity had risen to 33%, the director who had previously served as chairman of four committees was not proposed for re-election. Although the progress made on board gender diversity is welcome, we will continue to engage with the company to encourage changes to its nomination processes. We believe that this would help to ensure smooth transition of directors’ responsibilities and provide shareholders with greater clarity on the board’s succession planning and efforts to maintain a balanced composition.