In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the "multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses," still, many of these companies "have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. 'Corporate America has failed black America," said [the African-American president of the Ford Foundation]. 'Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.'" In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
The African-American executives cited in the NYT article recommended a number of actions designed to improve hiring and promotion. One executive advocated that companies "first take the basic step of disclosing diversity figures, so that progress—or backsliding—can be measured." Another executive "called on companies to quadruple the size of their internship classes and commit to giving many of those spots to African-Americans, and then support them with mentors and sponsors." Another advocated that "[b]oards should hold themselves and management accountable for specific objectives around recruitment, retention and promotion of African-Americans and other minorities....Only when companies and management are accountable in ways that are quantifiable will we see real systemic transformation of corporate America." Similarly, another "called for companies to tie executive pay to diversity metrics." Yet another suggested that companies require their outside professionals to include at least one black member on their teams. And, because "change starts at the top," another recommendation was to increase the number of African-Americans represented on boards.
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As discussed in this PubCo post, this paper from the Rock Center for Corporate Governance at the Stanford Graduate School of Business seemed to reach the uncomfortable conclusion that the levels of diversity in the C-suite are inadequate to provide a real pipeline to some version of parity among corporate leaders. This deficiency is particularly striking with regard to the paucity of diverse executives in roles that the authors identify as "most likely to be prime candidates for advancement."
More transparency. As reported by the FT, proxy advisory firm ISS has been conducting outreach to companies, asking them to provide the race/ethnicities of their directors and named executive executives "on a voluntary, aggregated and self-identified basis." Rumor has it that the requested format is an Excel spreadsheet. In light of recent intensified scrutiny of diversity on boards and the influential role of ISS, according to the FT, "the extra disclosure could lead to votes against boards which shareholders deem to be insufficiently diverse." The article reports ISS data showing that, among companies in the Russell 3000, Black individuals accounted for just 4.1% of board members last year, relative to 13.4% of the U.S. population as a whole. The request "will allow each director to choose to disclose up to three ethnicities, from a list of eight in use by the US government since 1977, to describe their ethnicity as 'other' or to decline to answer." As reported by the FT, the letter from ISS "said it was looking 'to help ensure that all stakeholders have accurate and complete information as they consider the wider debate concerning the state of corporate diversity beyond gender,'" and that "it planned 'to engage with a broad cross-section of stakeholders on the potential need to expand the use of self-identified race and ethnicity director data' in its ESG ratings methodologies, voting policies and other offerings." According to the EY Center for Board Matters, as reported in the article, last year, 45% of companies in the Fortune 100 disclosed statistics on board racial/ ethnic composition, a significant increase from only 23% three years earlier.
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In a CDI from 2019, the SEC expanded on the disclosure required under Reg S-K where directors or nominees have voluntarily provided "self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background," consenting to disclosure of these diversity characteristics. According to Corp Fin, to the extent those self-identified diversity characteristics were considered by the board or nominating committee in assessing whether the person's "experience, qualifications, attributes or skills" were the right fit for the board, Corp Fin expects the discussion required by Item 401 to include, among other things, "identifying those characteristics and how they were considered." In addition, with regard to nominating committee disclosure, Corp Fin expects the description of diversity policies under Item 407 to "include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics." (See this PubCo post.) Query whether, in light of the heightened focus on racial inequality and injustice, the SEC will expand its requirements for disclosure about composition of the board and the workforce when it adopts proposed new rules regard human capital disclosure as part of its Reg S-K review? (See this PubCo post.)
Similarly, the NYC Comptroller's office, on behalf of three of the city's retirement systems, has asked 67 companies in the S&P 100 "that have issued statements in support of racial equality and/or affirming diversity and inclusion to match their words with concrete actions by disclosing EEO-1 Report data." That means a comprehensive breakdown of the workforce (by numbers, not percentages) by race, ethnicity and gender in ten employment categories, including senior management. The Comptroller's office considers the EEO-1 data to be "the 'gold standard' for diversity disclosure [that] will enable investors to evaluate the performance of portfolio companies in terms of their ability to hire, retain, and promote employees of color and women. The letter urges CEOs to take action where they can make a direct impact—within their own companies." The office suggests that disclosure of the data will enable companies to "demonstrate substantive progress in diversity and inclusion practices" and, if the practice is widely adopted, "to benchmark the company's own data to those of its peers, thereby facilitating the board's oversight of company human capital management practices." (Conducted perhaps by a reimagined compensation committee? See this PubCo post.) The NYT reports that only 40% of companies "are transparent about the gender and racial makeup of their employees," and only one has disclosed wage data by gender, ethnic and racial breakdowns. According to the Comptroller's office, "[r]esearch suggests that companies in the top quartile for gender and ethnic/cultural diversity on executive teams have stronger financial performance." Companies that do not comply may face shareholder proposals or opposition to the election of director nominees at their next annual shareholder meetings.
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And that risk is real. If you remember the actions of the Comptroller's office in kicking off the move toward adoption of proxy access with a series of 75 shareholder proposals in the first phase of its Boardroom Accountability Project in 2015 (see this PubCo post), followed by 72 proposals in 2016 (see this PubCo post), you'll suspect that a request to 67 companies is probably not the end of the line. What's more, in 2019, the Boardroom Accountability Project 3.0 called on companies to adopt a version of the "Rooney Rule" that went beyond gender: it requested companies to commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs were selected. (See this PubCo post.) The Comptroller's office also submitted shareholder proposals requesting adoption of the Rooney Rule to 17 companies that were identified as "lack[ing] apparent racial diversity at the highest levels." The proposals led to "negotiated pioneering Board and CEO diversity search policies with 13 leading companies." (See this PubCo post.)
Other institutional investors are also likely to promote their expectations regarding diversity and inclusion through both engagement and voting, beginning with expectations regarding transparency. For example, in its most recent report on investment stewardship on the issue of climate change, BlackRock, the largest asset manager, observed that, while the focus of its report was on climate-related issues, it conducts investment stewardship encompassing a much broader range of issues, including "topics that have been central to many companies' license to operate, particularly over the past few months, such as human capital management and diversity and inclusion. The COVID-19 crisis, and more recently the protests surrounding racial injustice in the United States and elsewhere, have underscored the importance of these issues and a company's commitment to serving all of its stakeholders." (See this PubCo post.) BlackRock has advocated that companies report on sustainability in line with SASB standards, which call for disclosure of the racial and ethnic profile of companies' U.S. workforces. BlackRock advises that, in "the second half of 2020, as we assess the impact of companies' response to COVID-19 and associated issues of racial equality, we will be refreshing our expectations for human capital management and how companies pursue sustainable business practices that support their license to operate more broadly. We also will continue to emphasize the importance of diversity in the board room and will consider race, ethnicity, and gender as we review a company's directors."
Performance metrics. According to this article in the NYT, experts suggest that one way to enhance diversity is to tie executive compensation to diversity goals. However, that's rarely done. Citing data from compensation consultant Pearl Meyer, the article reports that only "78 of roughly 3,000 companies said fulfilling diversity goals determined some portion of chief executives' pay." In some cases, the compensation at issue may not be significant enough to make a difference or the goal may not be sufficiently challenging. The Pearl Meyer data indicated that only 11 of the 78 companies "revealed the share of pay affected by fulfilling diversity goals, and 21 gave some details of their diversity goals." However, the article indicates that the topic is, at least, on the table for discussion at a growing number of companies. The article suggests that including diversity as a performance goal in compensation would not only demonstrate corporate commitment to diverse and inclusive workplaces, but it could also "provide a public scorecard that employees and shareholders could use to determine whether companies were following through on their commitments." Nevertheless, some companies have rejected the "formulaic" approach, arguing that detailed disclosure of data or more complex long-term strategies are more effective. One consultant cited in the article cautioned that a key goal is to promote an "increase in African-Americans into the boardroom and into the C-suite and up the ladder of the company....So when a C.E.O. metric is positively achieved, but within that metric the Black portion of it still has not been achieved, then I think we have failed." Will the enhanced attention to racial inequality spur more companies to include significant performance metrics based on achievements in diversity or more shareholders to submit proposals requesting that companies do so?
Legislation compelling board diversity. As reported in TheCorporateCounsel.net blog, a new bill, AB 979, has been introduced in California, designed to do for "underrepresented communities" on boards of directors what SB 826 did for board gender diversity.
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SB 826 required that publicly held companies (defined as corporations listed on major U.S. stock exchanges) with principal executive offices located in California, no matter where they are incorporated, include minimum numbers of women on their boards of directors. Under the law, each of these publicly held companies was required to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors (See this PubCo post.) There are currently two lawsuits challenging the legislation. (See this PubCo post.)
Has SB 826 made a difference? According to reporting from the WSJ, the answer is a big yes. As reported, when the law was signed on Sept. 30, 2018, 93 California-based companies in the Russell 3000 had all-male boards; a little over a year later, only 17 had no women on their boards. Since the law went into effect, according to the WSJ, 244 California companies in the Russell 3000 have added at least one female director, and 41 companies added two. Even more surprising, over 90% of companies in the S&P 500 now include two or more women on their boards, compared to 86% in the prior year. The law has meant that companies had to look outside of the usual channels—other boards and CEOs—to find female board candidates; the WSJ reports that over 60% of the women who joined the board of a California company in 2019 had never served on a public company board. And the non-profit 2020 Women on Boards announced that it has met its goal of 20% of board seats of companies in the Russell 3000 held by women. Notably, for the second year in a row, California had the largest increase in companies with 20% or more of their board seats held by women, which, WOB observed, "may be a direct result of the historic legislation requiring companies in the state to diversify their boards." In California, 68 more companies met the 20% goal in 2019 than in 2018. (See this PubCo post.)
Like SB 826, this bill would require, no later than the close of 2021, that a "publicly held corporation" (that is, a corporation with outstanding shares listed on a major U.S. stock exchange) with principal executive offices (according to its Form 10-K) located in California, no matter where it is incorporated, have a minimum of one director from an underrepresented community. A director from an "underrepresented community" means a director who self-identifies as African-American, Hispanic or Native American. The bill would require, no later than the close of 2022, that a corporation with more than four but fewer than nine directors have a minimum of two directors from underrepresented communities, and that a corporation with nine or more directors have a minimum of three directors from underrepresented communities. The bill would also require, on or before specified dates, that the Secretary of State publish various reports on its website documenting, among other things, the number of corporations in compliance with the bill's provisions. As with board gender diversity, the bill may compel companies to look outside their traditional channels to find new directors from underrepresented communities.
The findings set forth in the bill, which are intended to provide its rationale, seek to make the case that there is a deep underrepresentation of Black and other minority communities in industry, especially the high tech sector. The bill finds that only 31% of African-Americans and 22% of Latinos worked in management, professional and related occupations, while 54% of Asians and 41% of Whites worked in the same occupations; that, in 2019, 90% of CEOs were White, according to the Bureau of Labor Statistics; that high tech employs about one quarter of U.S. professionals and about 5% to 6% of the total labor force; that many jobs in computer science and engineering are increasing in number and have better pay, benefits and growth opportunities; that "highly ranked universities graduate African American and Latino computer science and computer engineering majors at twice the rate that leading technology companies hire them"; that, relative to private industry overall, the high tech sector employs more White and Asian-American employees and fewer African-American and Hispanic employees, particularly in the executive category, with less than 1% of Silicon Valley executives and managers being African-American; that, according to McKinsey, "for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8 percent; and, according to Dalberg Global Development Advisors, "the high tech industry could generate an additional $300–$370 billion each year if the racial or ethnic diversity of tech companies' workforces reflected that of the talent pool."
Originally published July 15, 2020.
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