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Diversity: In The Boardroom and Out 2021_900x330

Diversity: In the Boardroom and Out

Wednesday, February 26, 2020

Understanding where your company is in terms of its gender, race and ethnically diverse board is important.

Written by Peggy O'Keefe, Managing Director, Corporate Governance, EQ Proxy

In 2020, the push for diversity in public companies is coming from investors of many kinds: institutional investors, including public pension funds, socially responsible investors, religious institutions, as well as civil rights groups. While most effort is for gender diversity, there is an increased effort regarding racial and ethnic diversity as well.

Valuing diversity is not new. The Business Roundtable amended its Principles of Corporate Governance in 20161, emphasizing that gender, race, and ethnic diversity in boardrooms leads to greater board effectiveness and long-term value creation. But different sectors are now stressing the importance of diversity and these are considerations that many public companies are taking seriously.

Based on 2017 data of 1,000 companies in 12 countries, McKinsey & Company's “Delivering through Diversity” report found that companies in the top quartile for gender diversity on their executive teams were 21% more likely to have above-average profitability, compared to companies in the bottom quartile, based on EBIT margin2.

In addition to proxy advisory firms and institutional investors that have policies regarding board diversity, certain states and Congress now have laws, either in effect or proposed, that require public company boards to have specific minimum gender diversity. Other states require the disclosure of gender and race/ethnicity data. Social policy shareholder proposals that request reports on disclosure of pay data are expanding to include race and ethnic diversity, in addition to gender diversity, and are gaining support. The SEC is encouraging diversity disclosure as well.

Here is where different, but related and influential sectors, stand.

Proxy advisory firms and institutional investors

Institutional Shareholder Services Inc.’s (ISS) 2019 gender diversity policy, which it announced with a one-year transition period, goes into effect for the 2020 proxy season. ISS will recommend against the nominating committee chair, and potentially other directors, on a case-by-case basis, if there are no women on the board. The only exception is if the board has firmly committed, such as a timetable for the addition is disclosed, to reach the goal of at least one woman on the board within a year.

ISS’s 2020 voting policy updates note its expanded support for a social policy proposal regarding disclosure of pay data. Now, in addition to gender, ISS will expand its support for proposals requesting disclosure of such information in terms of race or ethnicity.

Glass Lewis voting policy calls for recommending a vote against the nominating committee chair, and potentially other members of the nominating committee, if there are no women on the board. The only exception is if the company has disclosed its rationale for not having any women, for example there is an agreement between a large shareholder and the company to have specific persons named as board nominees, or there is a firm commitment to add a woman with a timetable disclosed. Glass Lewis will take into account the size of the company and its industry. It will also examine the company’s disclosure of diversity factors utilized before recommending a vote against.

Support from institutional investors

Institutional investors are increasingly supportive of board diversity. BlackRock specifies that it wants to see at least two women on a company’s board, and may vote against members of the nominating committee if this standard is not met, and State Street looks for at least one woman on the board, or will vote against nominating committee members. Vanguard discusses in its proxy voting guidelines that diversity is among its key factors in evaluating directors to form a board that will effectively serve shareholders, and looks for gender diversity as well as other factors, including race, ethnicity, age, and background. Vanguard wants companies to broaden their search policies, and to disclose the measures utilized and perspectives on board diversity.

One of the largest pension funds, the NYC Retirement Systems (NYCRS), started its latest Boardroom Accountability Project, 3.03, last fall. The project focuses on diversity for boardrooms and CEOs. The prior project, 2.0, urged companies to disclose board gender, race, skills, and experience by utilizing a matrix. NYCRS adjusted its proxy voting guidelines in 2019 to vote against nominating committee members if the board “lacks meaningful gender and racial/ethnic diversity including but not limited to any board on which more than 80 percent of the directors are the same gender.”

NYC Comptroller Scott Stringer heads up this huge pension fund, and is pushing for increased diversity in public companies by urging them to utilize factors adopted from the Rooney Rule when considering board nominees and CEOs. The Rooney Rule is based on the NFL’s policy that requires football teams to interview ethnic-minority candidates for head coaching and general manager positions.

The nominating committee chairs of 56 S&P 500 companies that have not disclosed a diversity search policy that includes Rooney Rule factors received a letter from Comptroller Stringer, because he wants to see this language incorporated in search policies and disclosed. NYCRS indicated that it will file shareholder proposals at companies that lack racial diversity.

State and Federal Legislation

California was the first state to enact legislation (SB-826) requiring public companies that are either incorporated in California or whose principal executive office is located in California, to have a minimum of at least one female on the board of directors by Dec. 31, 2019. Additional gender diversity is required by Dec. 31, 2021, including:

  • For boards that have at least five directors, at least two must be female.
  • For boards of six or more directors, at least three must be female.

Failure to file the data in a timely fashion with the California Secretary of State results in a fine of $100,000, and another $100,000 fine if the minimum number of females on board is not met. Also, companies face a fine of $300,000 for each following year that the quota is not met.

The Secretary of State will then utilize taxpayer funds to produce an annual report on board gender diversity.

Unwelcome enforcement

Not everyone welcomed this law. Two lawsuits were filed in 2019 challenging its legality. Robin Crest, et al. v. Alex Padilla challenges the use of taxpayer funds to enforce gender quotas. Additionally, Creighton Meland, Jr. v. Alex Padilla challenges the gender-based quota requirement, stating that it violates the U.S. Constitution’s Equal Protection Clause of the 14th Amendment4. Both of these cases are pending.

New Jersey introduced a bill in February 2019 that is similar to the California law, which would require public companies whose principal executive office is located in New Jersey, to have at least one female on the board of directors by the end of 2019. This bill is still in committee. Michigan and Pennsylvania have similar bills pending.

Illinois now requires public corporations with principal executive offices within the state to report on the number of females and minorities on their boards (HB 3394). The original version of the law required boards to have at least one female and one minority board member, but this was watered down to simply require reporting the current data, as well as company plans to improve diversity. Other states now have requirements to report on board diversity, including Maryland, or have bills pending that would require this information, such as in New York, but do not yet require specific board diversity.

New York Representatives Gregory Meeks and Carolyn Maloney separately introduced legislation to the House. The Improving Corporate Governance through Diversity Act of 2019 and the Diversity in Corporate Leadership Act of 2019 were both passed by the House Financial Services Committee in July 2019. The former requires companies to disclose annually the voluntarily self-identified gender, ethnicity, race, and veteran status of board members and nominees, and senior executives. The latter bill requires public companies to disclose in their annual meeting proxy statements the gender, ethnicity, and race of each director and nominee to the board. Neither bill has moved from the House and the Senate bill is still in committee.


In February 2019, the SEC issued two identical compliance and disclosure interpretations (C&DIs), 116.11 and 133.13, under Regulation S-K5, related to disclosure of self-identified diversity factors such as gender, race, ethnicity, nationality, religion, disability, sexual orientation and cultural background for directors and nominees that have “consented” to this disclosure. The C&DIs cover what should be included for directors’ qualifications – 116.11 (Item 401) and director nominee qualifications – 133.13 (Item 407). The SEC wants the disclosure to include how the nominating committee or board took these diversity factors into consideration. However, the SEC does not require the committee to ask for this diversity information. That is, the SEC would only require the diversity considerations to be disclosed if the company asks for this information, e.g., on a director questionnaire, and it is self-identified by the director or nominee, who also consents to the disclosure, and the committee or board uses this diversity disclosure in its decision-making process on directors.

Assess your diversity status

Understanding where your company is in terms of these multiple diversity issues is important. As diversity disclosure is becoming increasingly sought after, public companies should be proactive and amend their director questionnaires to include more detailed diversity questions, allowing the person completing the form to self-identify and consent to the disclosure of this information. The “matrix” form is another consideration for companies to use to disclose in the proxy statement director gender, race, ethnicity, background, skills, sexual orientation, disability and other factors used to comprise a well-rounded board.

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