Brigid Rosati, managing director, business development and corporate strategy with Georgeson, dives into diversity and the impact it can have on the 2021 annual general meeting (AGM) season.
Investors have continued to show an interest in diversity in recent years, and 2021 is proving no exception. While past years have particularly focused on gender on boards and executive management, ongoing social unrest and protests over racism have catalyzed an expanded view to include race, ethnicity and workforce diversity. The improvement of gender diversity on boards in the US over the past few years has been attributed to increased investor, stakeholder and public interest, and more investors are now calling for companies to disclose their board and workforce diversity profiles.
Only 24 percent of Russell 3000 board seats are held by women, according to Equilar’s Q4 Gender Diversity Index, and about 6 percent have no women on their board. In addition, 68 percent of Russell 1000 companies do not release data on their workforce's racial and ethnic makeup, according to Just Capital. The current demand for disclosure is centered on seeing more companies provide clearly outlined metrics and goals aimed at enhancing board and workforce diversity practices, including board recruitment processes, diverse hiring and promotion programs as well as unadjusted pay gaps.
Vote outcomes from the 2020 US AGM season demonstrated the evolving focus on racial and ethnic diversity, broader workforce diversity and predictions for 2021. The New York City Comptroller was a driving force behind shareholder-sponsored proposals on board diversity from 2020, submitting 17 to companies in the S&P 1500. The Comptroller's focus lay in requests to companies to implement policies requiring the consideration of qualified women and racially or ethnically diverse candidates for director and external CEO searches.
The 2020 AGM season also saw increased voting activity around workforce diversity proposals, with 12 proposals going to a vote (up from seven in 2019); four of which received majority support. Many of these workforce diversity proposals sought reporting of the company’s workforce based on gender and the Employer Information Report EEO-1 racial and ethnic categories.
In July 2020, two unique diversity initiatives emerged immediately following the 2020 proxy season, both focused on transparency and data. The first was a letter from State Street noting its new focus on companies’ diversity data and racial and ethnic diversity strategies. The second was a letter-writing campaign from the New York City Comptroller targeting companies that had previously issued supportive statements on equality to disclose race, ethnicity and gender statistics through annual EEO‑1 Report data. Both efforts frame how investors may examine diversity with a clear focus on data, disclosure and racial or ethnic diversity in the 2021 proxy season.
Considering the 2020 proxy season’s emphasis on diversity disclosure and regulatory outcome, it seems highly likely that companies can expect increased investor focus on diversity topics heading into the 2021 proxy season. Dissatisfaction with a company’s lack of diversity improvement or diversity disclosure may most likely manifest itself through votes against directors and support of related shareholder proposals.
Most notably in January 2021, State Street announced that it would vote against specific directors in S&P 500 companies if they do not support racial and ethnic diversity disclosure of its Board beginning this year. Starting in 2022, State Street will vote against individual directors if a company in the S&P 500 does not disclose its EEO-1 report or have at least one director from an underrepresented community. BlackRock also announced that lack of disclosure on the diversity of a company’s workforce, in-line with EEO-1 data, may lead to votes against certain directors this year.
Companies may now also experience broader stakeholder interest in board diversity, workforce diversity and disclosure topics as they continue to take a spotlight in the news. In December 2020, Nasdaq filed a proposal with the SEC to adopt new listing rules which, if approved, would require all companies listed on Nasdaq’s US exchange to disclose board diversity statistics publicly and require most listed companies to have at least two ‘diverse’ directors.
In preparing for their 2021 AGMs, companies may find it beneficial to ensure diversity is on the boards’ agenda; take a proactive stance on planning; be armed with the company’s diversity statistics; and understand the company's position on disclosing or not disclosing this information. If a company chooses not to reveal the data, investors will likely expect a clear explanation. By planning for the 2021 AGMs, companies can provide a clear and thoughtful strategy for their diversity programs that shareholders may embrace and adopt.
Published March 19, 2021.
