Bucking up against rising public interest in boardroom diversity, American Financial Group (NYSE:AFG) recently called for shareholders to vote against a proposal from the Evangelical Lutheran Church in America (ECLA) and Calvert Asset Management that asked the company to take proactive steps to add female and minority candidates to its board. The company’s board, which is chaired by company founder Carl H. Lindner and presided over by his two sons, Carl H. Lindner III and S. Craig Lindner, who serve as the company’s co-CEOs, currently does not include even one female director.
AFG stated that it does not plan to make the requested changes and recommended that shareholders vote against it at the company’s May 11 annual meeting. But, in 2011, in the wake of the recent financial crisis, investors may be less willing than ever before to allow companies to stock their boards with insiders. In the end, the board diversity proposal received a 27% approval at American Financial’s May 2011 annual meeting, a sign that the idea won the approval of a significant portion of the company’s shareholders.
By continuing to resist the push to allow for increased boardroom diversity, American Financial is becoming something of a minority itself. According to GovernanceMetrics research, only one fifth of the U.S.’s publicly-listed large-cap companies have not yet appointed any women to their boards.
American Financial has defended itself by explaining that “the imposition on the nominating process of gender and minority requirements and affirmative search obligations would unduly restrict the Corporate Governance Committee in the performance of its duties and add administrative burdens and costs, without necessarily resulting in the selection of the best director candidates for the Company.”
Many leading financial companies are already taking action on this issue. MetLife, Inc. (NYSE: MET), The Travelers Companies, Inc. (NYSE: TRV), Piper Jaffray Companies (NYSE:PJC), BB&T Corporation (NYSE: BBT), and Wells Fargo & Company (NYSE: WFC) all have four women serving on their boards. GMI research also shows that across the globe, three-fifths of the companies in the financial services sector have appointed at least one woman to their boards.
Thus far American Financial has resisted considering boardroom diversity as a criterion for appointment, but the company clearly doesn’t hesitate to take family and other ties into consideration. Besides the company’s two current co-CEOs, who are the sons of the Carl H. Linder (who is also 91 years old), GovernanceMetrics research shows that half of the board’s members have served for over 20 years. Carl H. Lindner himself has been on the board since 1959. American Financial also stands out for having two co-CEOs, a practice seen at less than 1% of the U.S.
listed companies GMI rates and is viewed as being a non-optimal approach to managing the company. One positive is that the board is majority independent on GMI criteria and four of those
independent board members have significant financial expertise, seen as vital in the oversight of financial companies.
Still, investors appear to have some qualms about the company’s management structure. After all, a
substantial 26% of shareholders voted against the company’s co-CEO bonus plan at the May 2011 annual meeting. As projects like the CalPERS-CalSTRS “3D Project” get under way, the issue of boardroom diversity is likely to continue to gain momentum.
Insular boards can be of concern for investors because long-tenured directors can often form relationships that may weaken board accountability and therefore hinder their ability to provide effective and independent oversight. Board diversity, therefore, needs to be seen as part of a broader process of promoting board accountability and making sure that publicly traded companies appoint directors with a diverse range of experiences and expertise.
American Financial’s current board structure is not positioned to maximize the diversity of opinions and promote a rigorous check and balance to the company’s management. Instead of resisting the push towards increasing board diversity, American Financial could instead adopt a comprehensive approach that is designed to maximize the expertise of board members and the diversity of opinions in the board room.
[This article was orginally published in the 2011.2 edition of InFocus, GovernanceMetrics' research publication.]