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Disney shareholders’ approval of a race and gender pay equity proposal could be an indication that there is growing support for measures that can help hold companies accountable for commitments they’ve made regarding racial justice, economic inequality and diversity, equity and inclusion. As all of these topics are increasingly becoming a part of the larger conversation about environmental, social and governance issues, boards should begin examining how these shareholder concerns could present their company with potential risks. Similar proposals at other companies may be on the way.
The proposal filed by Arjuna Capital, was passed at Disney’s annual meeting in March with 59 percent shareholder support. Arjuna’s proposal asked that Disney produce a report on “both median and adjusted pay gaps across race and gender, including associated policy, reputational, competitive and operational risks, and risks related to recruiting and retaining diverse talent.”
Disney argued against the proposal in its proxy statement, stating: “The Board’s quarrel with the proposal is not its focus—as the Company is fully committed to achieving pay equity—but whether it is a necessary and effective use of Company resources given the policies, practices and reporting that the Company already has in place to achieve that end. Given the many ongoing initiatives that the Company is already pursuing to promote opportunity and equity, the Board believes it is not.”
The majority vote in favor of the measure may be an early indication that shareholders are starting to require much faster movement on social issues involving race and gender. There is still debate whether issues involving race and gender can be material to the growth of a company. The passing of this measure (and the filing of other copy-cat measures likely to follow it), appears to be an attempt to highlight the unfairness that results from having lax governance regarding the equal treatment of minorities and women at corporations. It may also serve as an incentive to scare companies into fixing any pay gaps before they are exposed by reporting them. So, what are the potential risks to companies when racial and gender pay equity is not a best practice?
• Human capital management risk. The current wave of employee resignations has given many companies a greater appreciation for their workers. This proposal, which seeks transparency about company pay practices toward women and minorities, would assure investors that companies are not using bias for profit. Companies that report significant gaps in pay for women and minorities would risk losing the minorities and women workers that they do have and may find it harder to recruit women and minorities in the future. Boards will have to consider that workers will likely choose not to join a company that has historically underpaid workers because of their race or gender.
Furthermore, if companies refuse to be transparent about racial and gender pay, some workers will assume that the company has something to hide. The current willingness of workers to quit their jobs means that competition for the best workers is tougher than it has been in previous cycles. So, if a company loses good workers because of pay equity issues (competitors offering better pay), it may be harder to replace them quickly, which can slow down productivity and may affect profits.
• Reputational risk. Once a shareholder proposal such as Arjuna’s is filed, the reputation of the company as being fair and honest is at stake. For some of the most admired companies in the US, the reputational risk could be substantial. The public perception of a company’s brand can potentially be worth billions of dollars. Consumers don’t have to announce an official boycott, but if they lose faith and trust in a company, they will likely look to spend their money elsewhere. This could lead to a drop in revenue and stock price. Any company that pays certain employees less because of their race or gender risks a major hit to its brand’s reputation in the marketplace with consumers and potential employees.
What credible reason can a company give for not paying people a similar wage for completing the same job? Boards will likely need be prepared to answer that question in a way that satisfies shareholders whether they choose to disclose race and gender pay gaps or not.
• Legal risk. Unfortunately, when companies fail to enact good governance practices, it often leads to litigation. Any companies shown to have significant gaps in pay to minorities and women should expect to have lawsuits alleging discriminatory practices filed against them. Such lawsuits hurt the company’s reputation and use financial resources to defend against them and pay settlements. Those lawsuits can ultimately have a material effect on company revenues, profits, and stock price gains.