Legislation—such as California's board racial/ethnic diversity mandate (see this PubCo post) and board gender diversity mandate (see this PubCo post)—is not the only route that diversity advocates are employing to diversify the ranks of corporate directors. Moral suasion—together with implicit or explicit voting pressure—is another avenue that some groups are pursuing. One group following this path is the Russell 3000 Board Diversity Disclosure Initiative, a new initiative recently organized by the Illinois State Treasurer. At the end of October, the Initiative sent a letter to companies on the Russell 3000, urging that they all disclose board racial/ethnic/gender data. Signed by over 20 investor organizations representing more than $3 trillion in assets under management and advisement, the letter waited until the to note that many of the signatories "either have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement."
According to the letter, the Black Lives Matter movement and the recent social unrest over systemic racial injustice have inspired a "national conversation on issues of racial equity and inclusion," leading a number of companies to issue strong statements in support of racial equity and justice. The letter exhorts companies to "harness this national movement and the momentum on gender diversity to consider publicly reporting the racial/ethnic and gender composition of the Board of Directors in your annual proxy statement for the 2021 filing." The letter identifies a matrix showing board demographics as a good model for disclosure.
According to the letter, studies have shown that diversity can have a favorable impact on shareholder value. The Connecticut State Treasurer, co-chair of the Initiative, cited research from McKinsey showing that "diversity enhances investment returns, and that companies with greater gender, racial and ethnic diversity, outperform their peers. As a fiduciary, my priority is creating a portfolio that has sustainable, long term-value. Promoting greater transparency around board diversity will improve accountability, and allow investors to use this information to maximize returns and safeguard shareholder value." More specifically, as indicated in this white paper from the Initiative, McKinsey "found that companies with the highest levels of racial and ethnic diversity at the executive level outperformed by 36 percent in terms of profitability." Likewise, according to McKinsey, there was "a profitability differential of 48 percent between companies with the highest gender diversity at the executive level and companies with the least. Further, boards in the top quartile of gender diversity have a statistically significant correlation with financial outperformance."
Although it is widely understood that racial/ethnic minorities are "highly underrepresented in corporate boardrooms," the Initiative contends that the movement to increase racial diversity on corporate boards is hampered by the paucity of data and reporting about board demographics. In support of that contention, the white paper cites EY's 2019 proxy season report, which concluded, following interviews with some of the largest institutional investors, that "investors face difficulties evaluating board performance and effectiveness due to in part to the lack of disclosure on diversity attributes, including race and ethnicity." While advocacy through proxy voting policies and direct shareholder-company engagement has helped to increase board gender diversity, the press release contends that the "lack of data on race and ethnicity...makes it difficult to apply the same tools and creates unnecessary barriers to investment analysis, due diligence and academic study." Public reporting of the racial/ethnic composition of boards in proxy statements "will not only provide companies with an important way to self-assess the quality of their board and position boards for optimal performance, but it will provide long-term investors with greater access to the total mix of information that better enables them to protect and grow their investments." Hat tip to thecorporatecounsel.net blog.
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