Could The Record Number Of Proposals Make Diversity A “Best Practice?”

With shareholder proposals at record levels, proxy advisors threatening to vote “against” directors on non-diverse boards and increasing state legislation threatening fines for lack of diversity, it may soon be all but mandatory.

Shareholders appear to be casting a higher level of scrutiny on companies in an effort to see that they live up to diversity commitments made in the aftermath of last year’s social justice movement ignited by the police killing of George Floyd. Diversity issues have emerged as a top ESG concern this year as shareholders and proxy advisors continue to ramp up pressure on companies to diversity their boards and release more information about the racial makeup of their employees. Corporate boards should evaluate their progress on diversity issues and prepare statements to defend their record on diversity should they be challenged by investors or proxy advisors.

The Los Angeles Times recently reported that according to Bloomberg Intelligence, a record 37 diversity-related shareholder proposals were filed this year, as of June 4th. Those proposals won an average 43 percent support with proposals at Union Pacific Corp., IBM and DuPont de Nemours garnering more than 80 percent support. Another proposal at American Express Corp. garnered 60 percent shareholder support. Analysts expect even more diversity proposals to be filed before the end of the year.

Institutional investors BlackRock, State Street and Vanguard have all stated they would vote against corporate directors that fail to diversify their boards. Proxy advisor Institutional Shareholder Services has indicated that it is prepared to vote against directors next year if boards don’t become more aggressive about diversifying their members. According to ISS, about 894 companies on the Russell 3000 and 28 of the S&P 500 still do not have a diverse board member. The pressure on these companies may be particularly intense over the next year.

With diversity-related shareholder proposals at record levels, proxy advisors threatening to vote “against” directors on non-diverse boards and with some states passing legislation threatening fines for companies that don’t diversify their boards, it appears diversity may be fast becoming a “best practice” for corporate boards. As we enter this environment over the next year, corporate boards may want to consider the following:

• Prepare an update on your diversity efforts. For those companies that have made pronouncements about supporting diversity and inclusion, prepare an update on the progress toward the goals or commitment that were promised. Since many shareholders appear to be asking about board diversity and about diversity among employees having a credible response regarding the company’s record on diversity will at least provide a place to begin discussions about whether change is needed. It is also better if the board knows sooner rather than later if the management team is following through on diversity commitments and why those efforts are failing or succeeding.

• Conduct and internal review and can document diversity within the company ranks. Simply saying “we don’t track that information” may no longer be a satisfactory answer when questioned about diversity numbers. In fact, that type of response may very well lead to a shareholder proposal asking for a full-blown diversity report.

If dealing with diversity is going to become a best practice, companies will need to find a suitable way of measuring and monitoring their efforts to meet general standards of reporting diversity numbers. If management can track inventories of multiple products, it can certainly take an inventory of its workforce.

Many companies are currently producing diversity reports, so studying what others have done should help boards develop ways to track diversity efforts at their company. Boards can demand management create a system that incorporates bringing in diverse talent with meeting certain business objectives. If shareholders demand it, it will have to be done, so turning the process into an exercise that can lead to financial gain for the company would be productive.

• Communicate and celebrate all positive results on diversity. If your company has done an admirable job of diversifying its board and has a diverse workforce, now is a good time to let those facts be known. Demonstrating that you have followed through on a commitment to diversity may win points with some investors and proxy advisory firms. If institutional investors are looking to invest in companies that value diversity, you may elevate your organization to the list of companies that they consider investing in. Furthermore, publicizing that your company has a diverse workforce and board may make you a more attractive to talent fleeing other organizations that have not yet created a diverse work environment.