There's a new kid on the block when it comes to corporate governance considerations for money managers: millennials.
This group, broadly defined as those born between 1980 and 2000, is on the list of considerations for money managers and consultants when considering investment portfolios — and also for the boards of the companies they invest in.
"Shifting demographics has brought diversity issues to the forefront, and this is now top of mind for executives and corporate boards," said Deb DeHaas, vice chairman and national managing partner of Deloitte's Center for Board Effectiveness in Chicago.
She said while there has been significant emphasis on the more traditional aspects of board diversity for a number of years — such as gender, race and ethnicity — "there's a new interest in the mix of skills, experiences and unique qualities that millennials possess. This combination can help bring an alternative perspective needed to facilitate strong performance to defend against new and emerging challenges," Ms. DeHaas said.
And for good reason: The World Economic Forum's most recent Global Shapers Survey for 2017 said 50% of the world's population is younger than 30.
Yet an analysis by Pensions & Investments of Bloomberg data showed that 13.2% of board members of U.S. and Western European companies were at or under the age of 40 as of the end of 2017, compared with 12.5% at the end of 2012. Further, 0.2% of companies had an average board member age of 45 or under as of Dec. 31, 2017, unchanged compared with the end of 2012.
Data for 2017 represented about 1,900 companies, while 2012 data represented about 1,600.
Talking to companies
Speaking at a recent briefing, Neil Dwane, global strategist at Allianz Global Investors in London, said the firm is "talking to a lot of our companies about having a 30-year-old on the board," on both the equity and debt sides of the business.
Referring to the millennial as the consumer for investee companies, Mr. Dwane added: "If they don't have a millennial close to the decision-making, you have no idea what (millennials as future consumers) want."
But it seems AllianzGI is ahead of the game in taking any form of action when it comes to the influence of the near-future's savers and investors — although there is recognition of its importance elsewhere, albeit as part of a broader diversity push.
"There has definitely been an increased interest in creating more diverse environments for decision-making," said Luba Nikulina, London-based global head of manager research at Willis Towers Watson PLC. "Gender diversity has gained a lot of visibility but the conversation has clearly moved on to discuss other, no less important, types of diversity, such as generational diversity, ethnic diversity, educational and socioeconomic diversity" and other factors.
This has been encouraged in the U.K. by a new Corporate Governance Code under the Financial Reporting Council, which came into force this year and requires that boards of corporations focus on succession and diversity, as well as culture more generally and better engagement.
"All these additional requirements play to the momentum of the millennium cohort gaining better representation in various forums with high-stakes business decisions," Ms. Nikulina said. "In addition, millennials are quickly becoming the majority of the workforce and consumers so ensuring their voice is heard in the right forums is crucially important for businesses which would like to position themselves for future success."
It is an interesting discussion, said Howard Sherman, head of corporate governance business development at MSCI Inc. in London. "While our governance assessment doesn't specifically call for a millennial on the board, our model includes a key metric called 'entrenched board,' which is based on a combination of factors including average director age and tenure."
Companies identified as having an entrenched board are flagged and have scores deducted in the index provider's methodology for rating a firm.
MSCI, FTSE Russell and S&P Global Inc. do not have any indexes that specifically track companies with millennials on their boards.
And many money managers, while recognizing the importance of diversity, do not have millennial policies.
No explicit requirements
"We haven't formally placed any explicit requirements on companies we invest in to have representation of millennials on their boards or elsewhere within the business," said My-Linh Ngo, head of environmental, social and governance investment risk at BlueBay Asset Management LLP in London. "However, I would say that, implicitly, we would expect management to ensure they have access to talent which maximizes their ability to execute their business activities effectively and ensure long-term financial sustainability. So our focus is on quality of people."
BlueBay officials are aware of the "growing significance of wider macro societal trends such as changing demographics and how increasing consumer concerns about (environmental and social) issues are influencing purchasing decisions. But whilst millennials have been highlighted as a group which may have meaningfully different consumer behaviors and practices, we would say this is but just one dynamic occurring in the market," added Ms. Ngo.
Schroders PLC does not explicitly ask for millennials on boards, but rather looks at boards as a whole, said Daniel Veazey, head of corporate governance analysts in London. "We'd prefer not to just tick a box to get women or millennials on boards. We devise our analysis around a range of subjects, which include but (are) not limited to more diversity, younger boards and digital experience."
Sources have noticed a lack of emphasis by money managers. "The short answer is that active managers want to see diversity across all dimensions in the management teams and boards of the companies in their portfolios, but few if any highlight youth as the key criterion," said Gabriel Altbach, founding principal at Asset Management Insights LLC in Boston, a money management consultant.
However, many executives in the active investment community are increasingly focused on identifying cognitive diversity "as the real underlying objective when they screen for demographic characteristics like gender and ethnicity," although that is a challenge to achieve in practice since "getting at how people think required in-depth conversations and research," he said.
"That said, managers running highly concentrated portfolios probably stand a better chance of being able to ferret out which management teams and boards are genuinely comprised of individuals with diversity of thought," added Mr. Altbach.
Asset owners also are split when it comes to focusing on millennials. Matthew Sweeney, a spokesman for New York state Comptroller Thomas P. DiNapoli, said in an email: "Comptroller DiNapoli's board diversity shareholder proposals seek greater inclusion on a number of fronts, including age. Younger board members can provide a deeper understanding of changing consumer patterns, social media and digital marketing." The comptroller is sole trustee of the $209.2 billion New York State Common Retirement Fund, Albany.
And a spokeswoman for the $219.2 billion California State Teachers' Retirement System, West Sacramento, said the fund does not have any initiatives or engagements specific to millennials. "We engage and campaign (when we see necessary) for a deep and broad diverse board and workplace," she said in an email.
While managers may not be demonstrating their requirement for millennials on boards, companies are. Deloitte's Ms. DeHaas said as the U.S. has become increasingly diverse, "forward-thinking boards are determining ways to enhance diversity — and this includes increasing the number of millennials in the boardroom seats." This ensures companies have people in place to understand current and future consumer purchasing and investment trends, digitization and emerging technologies, and implications for the workplace of the future, she added.
"While millennial representation has not historically been sought after, tech startups, traditional companies and financial institutions will greatly benefit from bringing in millennials' unique perspective into the boardroom," said Ms. DeHaas.
Any move toward incorporating these new views is positive. "It's exciting to see this trend in what it tells us about the modern boardroom — and about the evolution of corporate governance more broadly," said Martyn Chapman, head of strategy for Nasdaq Governance Solutions in New York. "Boardrooms are becoming more diverse, more technology-savvy, and more inclusive of fresh perspectives to ensure a company is meeting its overall mission and vision."