Following on from the 2008 financial crisis, the Kay Review, the growing body of research evidence which showed that better run companies outperform their peers, providing greater returns for pension schemes, and of course the watershed moment of the '2012 shareholders spring'; stakeholders have become increasingly aware that companies were not being adequately held to account. The call in particular for pension schemes to become more active in improving the environmental, social and corporate governance (ESG) of businesses and by so doing, improve the way major coroporate concerns are run, began to reverberate.

The Red Lines came about as a response to this call. Developed by the Association of Member Nominated Trustees (AMNT), the Red Lines Voting Initiative is the UK's first ready-made, easy to understand policy for investors on ESG issues and empowers pension schemes to take a more active, if not assertive asset ownership role in becoming more responsible investors. 

The Red Lines have been designed specifically to enable those investing in pooled funds to direct votes associated with their investment more responsibly. To give you an idea of the possible impact of this initiative, of about £5.5-trillion of assets which are currently under management in the UK, more than £2.5 trillion are in pooled funds.

The Red Lines identifies poor corporate practice which should always be opposed, and gives a set of tightly drawn voting instructions to fund managers on how to to use schemes' votes to oppose such practice. The Red Lines cover a wide range of environmental, social and governance areas where failure to meet reasonable standards are viewed as posing a real risk to the company and its shareholders over the long term. 

The Red Lines that address social issues were developed in accordance with the UK Corporate Governance Code, Principles 1,2,3,4,5,6 and 10 of the United Nations Global Compact and a number of associated conventions of the International Labour Organisation (ILO). Collectively they cover a wide range of social issues including labour standards, the minimum wage, zero hours contracts, equality, diversity, inclusion and equal opportunities. The diversity related Red Lines and are embodied in S2, S3, S4 and S5 as follows: 

Red Line S2.

In Year One, if the company has not committed itself to publish within the next 12 months equality monitoring data for its workforce covering at minimum gender, race and disability, and including management and board, vote against re-election of the chair of the committee responsible for corporate social responsibility or, in the absence of such committeee, vote against he chair of the board.

In Year Two, if the company has not yet begun annual publication of such data vote as above.

Red Line S3.

If there is no diversity strategy in place to address a lack of minority ethnic representation at board or senior management level, and there is no visible minority representation at that level, vote against the chair of the nomination committee.

Red Line S4.

Vote against the re-election of the chair of the nomination committee if there is no strategy in place to address any under-representation of women at board level and fewer than 25% of the company's board members are female.

Red Line S5.

Vote against the chair of the nomination committeee if the company does not have a policy of market testing of all board and senior management positions through an open appointments process for all vacancies. 

The rationale for these Red Lines are clear.  It is in the shareholders' interests that the company is employing the best people regardless of their race, gender or disability status; that the most senior executives who run the company are selected on merit, in a process that is open, fair, transparent and market driven, and that the board has a wide diversity of talent at its disposal, 25% of which should comprise of women as set out by the Davies Review 2011 as the target to be met by 2015.

The Corporate Governance framework in the UK is currently going through a period of change, driven largely by ESG concerns. In February the Department of Business, Innovation & Skills (BIS) launched its consultation on the implementation of the EU Directive on disclosure of non-financial and diversity information, which came hot on the back of an EU Commission consultation on the form and content for non-financial information reporting. What is clear is that the Red Lines Initiative along with other similar projects, are collectively playing a vital role in improving the corporate governance landscape, and in making the workplace a fairer, more diverse, inclusive and productive place.

About the author

Glanville Einstein Williams is a Diversity and Inclusion Specialist.