How Will Boards Respond To Increasing Shareholder Proposals On Diversity?

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As such proposals become more commonplace, companies will need to be prepared to bolster their reasons for dismissing shareholder requests.

The ongoing campaign to diversify corporate boards appears to have intensified additional efforts from investor groups seeking greater diversity and inclusion at American companies. Boards may find they receive shareholder proposals requesting their companies conduct audits on race and diversity as well as proposals asking companies to consider qualified women and nonwhite candidates for all open positions throughout the company. These proposals may be intended as an additional push to get companies to do more to show their commitment to diversity than just adding a single diverse board member.

Internet retailer Amazon recently received both such proposals. The company immediately asked the SEC to block the proposals as a nuisance to its handling of day-to-day management of the company, which typically has been enough to dismiss many shareholder proposals. However, with the increasing emphasis on the importance of diversity from many large institutional investors like BlackRock, proxy advisory firms ISS and Glass Lewis, and the Nasdaq stock exchange, it’s unclear whether regulators will begin to favor efforts to ensure companies are actually making good on their claims of embracing greater diversity and inclusion throughout the organization.

Labor union advocate AFL-CIO filed the proposal asking Amazon to give greater consideration of women and nonwhite candidates for all open positions. AFL-CIO deputy director Brandon Rees told the Seattle Times, “If you don’t have a diverse pipeline of talent, it could be hard to fulfill the roles of ensuring equity throughout the organization.”

Amazon’s responded by supplying evidence that it was essentially complying with the aims of the proposal already by interviewing diverse candidate at career fairs and by recruiting from diverse colleges. Amazon also showed that it doubled the number of Black directors and vice presidents at the company last year and explained how the proposal could hurt the company’s efforts to expand quickly to meet growing demand. These actions strengthen the chances that the SEC will allow Amazon to exclude these two proposals from voting items at the next shareholders meeting.

As proposals such as these become more commonplace, companies will need to be prepared to bolster their reasons for dismissing shareholder requests. Boards might want to:

Create a board committee to study diversity at the company. Whether boards agree with these proposals or not, they need to create a committee to examine the evolving environment surrounding diversity and inclusion. If the board receives such a proposal, the company must respond in an intelligent and substantial way. Having statistics to back up company diversity efforts will go a long way to push back against the need for audits and other diversity measures.

Additionally, companies need to be clear about how they are actively addressing diversity concerns throughout the company since the spotlight appears to be shifting from the boardroom to the company at large. Hopefully a committee on diversity can objectively look at what the company is doing to advance diversity and inclusion, make recommendations on ways to improve diversity efforts and begin collecting data that may wind up going in the proxy statement of a more formal report on company diversity (if shareholders demand it).

If nothing else, the formation of a “diversity committee” can be used as evidence that the board is taking diversity efforts seriously (so long as the committee can implement real change).

Consider improving community engagement efforts to mitigate reputational damage from fighting diversity proposals. With more Americans currently pushing for racial equity and gender equality, publicly opposing proposals seeking those aims may not go over well with customers and other stakeholders. Companies that are adamant about opposing diversity-related proposals will need to work overtime to prove that they are not against having certain types of people as employees and/or among their leadership ranks. If a company appears to oppose extending equal opportunities to women, minorities or others, protests, boycotts or lawsuits could result. None of those outcomes will be good for share price growth. Finding ways to involve the community in the growth and development of women and minorities in company expansion efforts will go a long way to dampening any bad feelings if companies choose to oppose these proposals.

Hold board discussions on diversity as a strategy for company growth and profitability. If shareholders are encouraging the board to adopt certain measures, it often makes since to consider “what’s the worst that can happen if the company does?” Over the last few years studies have provided evidence that greater diversity improves corporate returns. With so much available data on this issue, boards have an opportunity apply some of the findings to their company to see if they would produce better results. Boards can hire diversity experts to help them search for ways diversity might improve business performance if they don’t have a director who is an expert on the issue. It makes sense to find out how diversity can support the strategic aims of the company for the benefit of all stakeholders.

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