Expanding Views Of Board Diversity Present Challenges For Boards

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Even companies that have embraced board diversity may need to discuss and develop a position regarding these newly emerging interpretations of what “board diversity” should represent. Suggestions for how to keep disagreement to a minimum.

Now that California’s law requiring publicly held companies headquartered in the state to diversify their boards with racial and ethnic minorities and those who identify as LGBTQ has been overturned, it may be even more important for boards to clearly communicate their positions on board diversity. Companies that have already shown a willingness to diversify their boards can reaffirm their commitment and win favor from shareholders and regulators who view board diversity as a best practice in governance. Companies that are opposed to or not yet decided can reemphasize the reasons they feel board diversity is not a priority and better prepare their response to shareholders and customers who may confront them on the issue.

Calls for board diversity from investors are continuing and, in some cases, shareholder expectations are expanding. Sustainable investment firm Arjuna Capital currently has shareholder proposals on board diversity at Wells Fargo, Google and Tesla that seek to go beyond what the California law had prescribed. Arjuna’s proposals are asking that the makeup of the board reflect the percentage makeup of the company’s customer base—this represents a significant change from asking boards to add one or more members of underrepresented groups.  

Similarly, some diversity advocates are arguing that there should be timelines for progress on diversifying boards and some way to hold companies accountable. And on top of that is the issue of “how much progress is viewed as enough progress,” and what metrics should be used to determine that answer. There are no “one-size-fits-all” answers to these questions.  

Even companies that have embraced board diversity may need to discuss and develop a position regarding these newly emerging interpretations of what “board diversity” should represent. There are bound to be disagreements. What should corporate board members consider doing if expanding board diversity continues to be an issue?

Survey large investors—again. As with most shareholder concerns, it’s important to find out the perspectives of key shareholders that directors have good relationships with on a regular basis. Understanding the views of shareholders that may have influence in the marketplace will help the board prepare responses to any board diversity questions that may come up in the future. Have shareholder concerns changed since the California law was revoked? What do your shareholders think about the new board diversity proposals that seek to tie board representation with the customer base? Soliciting answers to these questions is preferable to being blindsided by a shareholder proposal.

Improve transparency on board diversity. If it isn’t being done already, report board diversity information in the company proxy statement. Sharing this information including the percentages of underrepresented groups on the board is what the largest institutional investors are advocating for and what most companies interested in good governance are doing. This practice may also help incumbent directors avoid “against” votes from institutional investors as they seek reelection to the board.

• Review board diversity aims with management. Do the board and management agree on some of the expanded expectations of what board diversity may mean? This is a major consideration for boards.

It’s also important that the board and management agree on why the company’s long-term growth will or not benefit from a diverse board. The company’s position on board diversity will be communicated through management, so it is important that the methods and strategy behind that communication are believed to be in the best interest of the company and its stakeholders. If management does not believe that the board should be diversified, then the board and management must agree on what will be done to mitigate any negative actions that might be taken by investors or others.

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