Last week, ISS released for public comment a number of proposed voting policy changes to be applied for shareholder meetings taking place on or after February 1, 2021. The proposed changes for U.S. companies relate to board racial/ethnic diversity, director accountability for governance failures related to environmental or social issues and shareholder litigation rights, i.e., exclusive forum provisions. Comments may be submitted on the proposals through October 26, 2020.
Crest v. Padilla redux—conservative activist group challenges AB 979, California’s board diversity law for “underrepresented communities”
It didn’t take long. From the folks that brought you Crest v. Padilla (see this PubCo post), we now have the sequel, Crest v. Padilla II. You might recall that, shortly after SB 826, California’s board gender diversity bill, was signed into law, a conservative activist group challenged the new law, filing Crest v. Alex Padilla I in California state court on behalf of three California taxpayers seeking to prevent implementation and enforcement of SB 826. With AB 979 signed into law just last week (see this PubCo post), the same three plaintiffs represented by the same conservative group have now filed a similar lawsuit challenging this new law on essentially the same basis. AB 979 requires boards of public companies, including foreign corporations with principal executive offices located in California, to include specified numbers of directors from “underrepresented communities.” Framed as a “taxpayer suit” much like Crest v. Padilla I, the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota and violates the California constitution.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
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?
A lot of worthwhile energy in the last few years has been concentrated on increasing diversity in corporate leadership—especially board gender diversity— but how much progress is being made at the level of the C-suite? This paper from the Rock Center for Corporate Governance at the Stanford Graduate School of Business addresses the sorry state of the C-suite as a whole when it comes to diversity of any kind. According to the paper, notwithstanding numerous efforts launched by asset managers, institutional investors and companies to increase diversity in board and senior leadership, these efforts “have not contributed to tangible progress in increasing the prevalence of diverse executives in corporate leadership positions.” Why have these efforts not been more successful? The paper looks at C-suite (CEO and direct reports) demographics to get a better handle on the “actual pipeline, as it stands today, for next year’s newly appointed CEOs and future board members.”
You might recall that, in October last year, the Office of the NYC Comptroller launched its Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity. This third phase of the initiative called on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller’s Office, companies were asked to commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs were selected. Last week, Stringer announced the initial results of the initiative.
What’s the news from Davos? Well, the new Goldman Sachs CEO made some news when he told CNBC that, starting July 1, in the U.S. and Europe, Goldman will take companies public only if there is “at least one diverse board candidate, with a focus on women…. And we’re going to move towards 2021 requesting two.” He continued that, recently, there have been about 60 companies in the U.S. and Europe that have gone public with all white, male boards. However, over the last four years, “the performance of public offerings of U.S. companies with at least one female director is ‘significantly better’ than those without.” [Emphasis added.] While he recognized that the decision could cause Goldman to lose some business, “in the long run,” he said, “this I think is the best advice for companies that want to drive premium returns for their shareholders over time.” Will other investment banks follow suit?
NYC Comptroller’s Office initiates Boardroom Accountability Project 3.0 promoting adoption of the “Rooney Rule”
And speaking of the NYC Comptroller’s Boardroom Accountability Project, as I just did in this PubCo post on the Project’s push for proxy access, on Friday, Stringer announced the newest phase of the Project, Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity. The third phase of the initiative calls on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller’s Office, companies would commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs are selected. The announcement claims that the Project 3.0 represents “the first time a large institutional investor has called for this structural reform for both new board directors and CEOs.” Notably, the announcement also indicates that the Comptroller’s Office will “file shareholder proposals at companies with lack of apparent racial diversity at the highest levels.” The Comptroller’s Office characterizes the new initiative as the “cornerstone” of its Boardroom Accountability Project that “seeks to make meaningful, long-lasting, and structural change in the market practice so that women and people of color are welcomed in the door and considered for every open director seat as well as for the job of CEO.” Given Stringer’s success with his proxy access campaign, companies should pay close attention.
Corp Fin has posted a new Compliance & Disclosure Interpretation under Reg S-K that relates to diversity disclosure. The new interpretation applies to both Item 401— Directors, Executive Officers, Promoters and Control Persons and Item 407—Corporate Governance.
Is board stability always a good thing? A new study from consultant Spencer Stuart showed that, in 2018, 428 new directors were elected to boards of companies in the S&P 500, the most new directors since 2004, representing an increase of 8% from 2017. What’s more, 57% of boards added at least one new director, and 22% appointed more than one new director. However, overall turnover remained “modest.” While these new directors added “fresh skills, qualifications and perspectives”—and many were women, minorities and/or first-time directors—nevertheless, the study concludes, “progress is mixed.”
According to a new report from the EY Center for Board Matters, 54% of the 2017 class of directors of Fortune 100 companies served in non-CEO roles and 40% were female. More than half of the Fortune 100 added at least one independent director, slightly less than in 2016, but together, over the two-year period, over 80% of the Fortune 100 added at least one independent director. The result was that, taking director exits into account, “nearly all of the companies experienced some type of change in board composition during this period.” The EY Center’s associate director told the WSJ that the report showed “‘an increase in board diversity along the different dimensions of gender, age, ethnicity and in some cases socioeconomic background,’…. That means demand is growing for people who can offer ‘a more nuanced, multidimensional look’ at what is… happening with regard to consumer demographics, disruptive technology and workforce management, among other areas, she said. ‘The consensus is the best way to provide for boards to be able to see around corners, to ask the right critical questions, to get to the best answer possible, is to have a board that has the right mix of skills, expertise, background and perspective….There’s more openness to considering more and different perspectives.’”