In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation.  And now, third parties—from proxy advisors to institutional investors to legislators—are  taking steps to induce companies to take some of these actions.  Will they make a difference?

The African-American executives cited in the NYT article recommended a number of actions designed to improve hiring and promotion.  One executive advocated that companies “first take the basic step of disclosing diversity figures, so that progress—or backsliding—can be measured.” Another executive “called on companies to quadruple the size of their internship classes and commit to giving many of those spots to African-Americans, and then support them with mentors and sponsors.” Another advocated that “[b]oards should hold themselves and management accountable for specific objectives around recruitment, retention and promotion of African-Americans and other minorities….Only when companies and management are accountable in ways that are quantifiable will we see real systemic transformation of corporate America.” Similarly, another “called for companies to tie executive pay to diversity metrics.” Yet another suggested that companies require their outside professionals to include at least one black member on their teams. And, because “change starts at the top,” another recommendation was to increase the number of African-Americans represented on boards.

More transparency. As reported by the FT, proxy advisory firm ISS has been conducting outreach to companies, asking them to provide the race/ethnicities of their directors and named executive executives “on a voluntary, aggregated and self-identified basis.”  Rumor has it that the requested format is an Excel spreadsheet. In light of recent intensified scrutiny of diversity on boards and the influential role of ISS, according to the FT, “the extra disclosure could lead to votes against boards which shareholders deem to be insufficiently diverse.” The article reports ISS data showing that, among companies in the Russell 3000, Black individuals accounted for just 4.1% of board members last year, relative to 13.4% of the U.S. population as a whole.  The request “will allow each director to choose to disclose up to three ethnicities, from a list of eight in use by the US government since 1977, to describe their ethnicity as ‘other’ or to decline to answer.”  As reported by the FT,  the letter from ISS “said it was looking ‘to help ensure that all stakeholders have accurate and complete information as they consider the wider debate concerning the state of corporate diversity beyond gender,’” and that “it planned ‘to engage with a broad cross-section of stakeholders on the potential need to expand the use of self-identified race and ethnicity director data’ in its ESG ratings methodologies, voting policies and other offerings.”  According to the EY Center for Board Matters, as reported in the article, last year, 45% of companies in the Fortune 100 disclosed statistics on board racial/ ethnic composition, a significant increase from only 23% three years earlier.

Similarly, the NYC Comptroller’s office, on behalf of three of the city’s retirement systems, has asked 67 companies in the S&P 100 “that have issued statements in support of racial equality and/or affirming diversity and inclusion to match their words with concrete actions by disclosing EEO-1 Report data.” That means a comprehensive breakdown of the workforce (by numbers, not percentages) by race, ethnicity and gender in ten employment categories, including senior management.  The Comptroller’s office considers the EEO-1 data to be “the ‘gold standard’ for diversity disclosure [that] will enable investors to evaluate the performance of portfolio companies in terms of their ability to hire, retain, and promote employees of color and women. The letter urges CEOs to take action where they can make a direct impact—within their own companies.” The office suggests that disclosure of the data will enable companies to “demonstrate substantive progress in diversity and inclusion practices” and, if the practice is widely adopted, “to benchmark the company’s own data to those of its peers, thereby facilitating the board’s oversight of company human capital management practices.”  (Conducted perhaps by a reimagined compensation committee? See this PubCo post.)  The NYT reports that only 40% of companies “are transparent about the gender and racial makeup of their employees,” and only one has disclosed wage data by gender, ethnic and racial breakdowns.  According to the Comptroller’s office, “[r]esearch suggests that companies in the top quartile for gender and ethnic/cultural diversity on executive teams have stronger financial performance.” Companies that do not comply may face shareholder proposals or opposition to the election of director nominees at their next annual shareholder meetings.

Other institutional investors are also likely to promote their expectations regarding diversity and inclusion through both engagement and voting, beginning with expectations regarding transparency. For example, in its most recent report on investment stewardship on the issue of climate change, BlackRock, the largest asset manager, observed that, while the focus of its report was on climate-related issues, it conducts investment stewardship encompassing a much broader range of issues, including “topics that have been central to many companies’ license to operate, particularly over the past few months, such as human capital management and diversity and inclusion. The COVID-19 crisis, and more recently the protests surrounding racial injustice in the United States and elsewhere, have underscored the importance of these issues and a company’s commitment to serving all of its stakeholders.” (See this PubCo post.)  BlackRock has advocated that companies report on sustainability in line with SASB standards, which call for disclosure of the racial and ethnic profile of companies’ U.S. workforces. BlackRock advises that, in “the second half of 2020, as we assess the impact of companies’ response to COVID-19 and associated issues of racial equality, we will be refreshing our expectations for human capital management and how companies pursue sustainable business practices that support their license to operate more broadly. We also will continue to emphasize the importance of diversity in the board room and will consider race, ethnicity, and gender as we review a company’s directors.”

Performance metrics. According to this article in the NYT,  experts suggest that one way to enhance diversity is to tie executive compensation to diversity goals. However, that’s rarely done. Citing data from compensation consultant Pearl Meyer, the article reports that only “78 of roughly 3,000 companies said fulfilling diversity goals determined some portion of chief executives’ pay.” In some cases, the compensation at issue may not be significant enough to make a difference or the goal may not be sufficiently challenging.  The Pearl Meyer data indicated that only 11 of the 78 companies “revealed the share of pay affected by fulfilling diversity goals, and 21 gave some details of their diversity goals.”  However, the article indicates that the topic is, at least, on the table for discussion at a growing number of companies.  The article suggests that including diversity as a performance goal in compensation would not only demonstrate corporate commitment to diverse and inclusive workplaces, but it could also “provide a public scorecard that employees and shareholders could use to determine whether companies were following through on their commitments.”  Nevertheless, some companies have rejected the “formulaic” approach, arguing that detailed disclosure of data or more complex long-term strategies are more effective. One consultant cited in the article cautioned that a key goal is to promote an “increase in African-Americans into the boardroom and into the C-suite and up the ladder of the company….So when a C.E.O. metric is positively achieved, but within that metric the Black portion of it still has not been achieved, then I think we have failed.”  Will the enhanced attention to racial inequality spur more companies to include significant performance metrics based on achievements in diversity or more shareholders to submit proposals requesting that companies do so?

Legislation compelling board diversity. As reported in blog, a new bill, AB 979, has been introduced in California, designed to do for “underrepresented communities” on boards of directors what SB 826 did for board gender diversity.

Like SB 826, this bill would require, no later than the close of 2021, that a “publicly held corporation” (that is, a corporation with outstanding shares listed on a major U.S. stock exchange) with principal executive offices (according to its Form 10-K) located in California, no matter where it is incorporated, have a minimum of one director from an underrepresented community.  A director from an “underrepresented community” means a director who self-identifies as African-American, Hispanic or Native American. [Update: On July 28, the bill was amended to revise this definition to a apply to a director who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native.]

The bill would require, no later than the close of 2022, that a corporation with more than four but fewer than nine directors have a minimum of two directors from underrepresented communities, and that a corporation with nine or more directors have a minimum of three directors from underrepresented communities.  The bill would also require, on or before specified dates, that the Secretary of State publish various reports on its website documenting, among other things, the number of corporations in compliance with the bill’s provisions. As with board gender diversity, the bill may compel companies to look outside their traditional channels to find new directors from underrepresented communities.

The findings set forth in the bill, which are intended to provide its rationale, seek to make the case that there is a deep underrepresentation of Black and other minority communities in industry, especially the high tech sector.  The bill finds that only 31% of African-Americans and 22% of Latinos worked in management, professional and related occupations, while 54% of Asians and 41% of Whites worked in the same occupations; that, in 2019, 90% of CEOs were White, according to the Bureau of Labor Statistics; that high tech employs about one quarter of U.S. professionals and about 5% to 6% of the total labor force; that many jobs in computer science and engineering are increasing in number and have better pay, benefits and growth opportunities; that “highly ranked universities graduate African American and Latino computer science and computer engineering majors at twice the rate that leading technology companies hire them”; that, relative to private industry overall, the high tech sector employs more White and Asian-American employees and fewer African-American and Hispanic employees, particularly in the executive category, with less than 1% of Silicon Valley executives and managers being African-American; that, according to McKinsey, “for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8 percent; and, according to Dalberg Global Development Advisors, “the high tech industry could generate an additional $300–$370 billion each year if the racial or ethnic diversity of tech companies’ workforces reflected that of the talent pool.”

Posted by Cydney Posner