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NY pension fund: More regulation needed on board diversity disclosures

New York State Common Retirement Fund engaging SEC on mandating board disclosures on diversity.

Third-largest U.S. public pension plan has had a "zero-woman zero-vote" policy since March.

Lack of quality data identified as key ESG challenge for asset owners.

Investors are increasingly speaking out about their desire for meaningful data on environmental, social and governance, or ESG, indicators. For instance, in a recent survey on sustainable investing by Morgan Stanley, less than half of respondents said they had adequate tools, including quality data, to assess sustainable investments.

S&P Global Market Intelligence spoke with Gianna McCarthy, director of corporate governance at the New York State Common Retirement Fund, which had $207.4 billion in assets as of March 31, about the data gap and the prospect of regulatory intervention. Below is an edited transcript of the interview.

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Gianna McCarthy, director of corporate governance at the New York State Common Retirement Fund.
Source: Office of the New York State Comptroller

S&P Global Market Intelligence: Can policymakers do more to ensure that ESG reporting practices are sufficient to meet investors' needs?

Gianna McCarthy: We have been engaging the U.S. Securities and Exchange Commission on this issue and would like to see the commission mandate disclosure of the diversity of the board of directors of publicly traded companies. We recently called on them, alongside other investors, to establish a standardized framework requiring public companies to disclose environmental, social and governance risks. In a June Congressional Oversight Committee hearing, SEC Chairman Jay Clayton committed to re-examining the thresholds for smaller reporting companies in order to expand the number of companies eligible to provide disclosure.

We think more regulatory action can be taken to promote greater diversity on boards, which would lead to more sustainable companies and a more sustainable economy. In an increasingly complicated global marketplace, the ability to draw on a wide range of viewpoints, backgrounds, skills and experience is critical to a company's long-term success. Thriving companies are a critical element to a healthy economy. Moreover, there are trillions of dollars at stake, and we think better data would help the proxy voting process along.

We are also assessing the California legislation requiring publicly traded companies headquartered in the state to have female board directors, but we don't have a view on that at this time.

Are reporting requirements alone effective in driving long-term, sustainable change?

Complete and comparable data is critical and it's one of many steps that needs to be taken in evaluating companies' long-term performance and risk management. Investors currently do not have this, so we're going to keep advocating for the information that we need to base our investment, voting and allocation decisions. Institutional investors across the board are struggling with this issue. A lot of the larger mutual fund families and other large asset managers have also started more explicitly talking about the importance of diversity in their corporate governance guidelines. It's not an end unto itself, but in order to be able to identify where we need to engage or act, we need better data.

What steps has your fund taken to promote diversity?

There is growing interest in gender-lens investing, and we have had a zero-woman zero-vote policy since March. As part of those guidelines, we would either withhold our vote or vote against all board directors standing for re-election at our public companies without women on the board. And if there's only one woman on the board, we will vote against the members of the board's governance committee. In addition to this, we also file shareholder proposals requesting changes to ensure that directors are chosen from a diverse pool.

As of Aug. 31, we have voted against 1,784 directors at 407 companies with zero women on their board during the proxy season just passed. We are preparing for the upcoming proxy season now. The policy has already had an impact on our portfolio companies, a number of whom have conducted a post-annual meeting where they have added a diverse member to the board of directors.

What steps are being taken to improve other areas, besides gender, where diversity is lacking?

I think one reason why there's been a focus on women is because it is somewhat ascertainable from the information that is already available to investors. Nonetheless, it's not perfect. In our proposals, we go beyond gender and use a wide range of diversity metrics, including LGBT, as well as a wide spread in attributes and skills. Gender is very important, but we think that other types of diversity are also critical across the company.