You probably remember that, late last year, Nasdaq filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. The proposal received a substantial number of comments, many of which were favorable and some of which were highly critical. For those of you who expected a speedy approval of this proposal by the SEC, you may need to reset your expectations.
Democrats and Republicans are busy “lobbying” the SEC these days. Republicans want the SEC to nix Nasdaq’s proposal for new listing rules regarding board diversity and disclosure. Democrats want the SEC to beef up its insider trading rules in connection with Rule 10b5-1 plans. Will either find a receptive audience?
In his 2021 letter to directors, Cyrus Taraporevala, President and CEO of State Street Global Advisors, one of the largest institutional investors, announced SSGA’s main stewardship priorities for 2021: systemic risks associated with climate change and the absence of racial and ethnic diversity. SSGA intends, he said, “to hold boards and management accountable for progress on providing enhanced transparency and reporting on these two critical topics.” SSGA’s new voting policies reflect those intentions.
Yesterday, Nasdaq announced that it has filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. If approved, it would likely be a game changer. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. The announcement indicates that the goal is to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.” In its 271-page filing, Nasdaq explains its rationale by presenting an analysis of over two dozen studies that “found an association between diverse boards and better financial performance and corporate governance.” According to Nasdaq’s President and CEO, Adena Friedman, “Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies….Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
Yesterday, ISS released its new benchmark policies, effective for shareholder meetings on or after February 1, 2021. In addition to anticipated policy changes (see this PubCo post) regarding board racial and ethnic diversity, shareholder litigation rights (such as exclusive federal forum provisions) and director accountability for governance failures related to environmental or social issues, ISS also made a number of other policy changes and clarifications, not previewed during the comment period, that generally relate to changing market practices, certain shareholder proposals and policies that were announced previously but subject to a transition period.
Legislation—such as California’s board racial/ethnic diversity mandate (see this PubCo post) and board gender diversity mandate (see this PubCo post)—is not the only route that diversity advocates are employing to diversify the ranks of corporate directors. Moral suasion—together with implicit or explicit voting pressure—is another avenue that some groups are pursuing. One group following this path is the Russell 3000 Board Diversity Disclosure Initiative, a new initiative recently organized by the Illinois State Treasurer. At the end of October, the Initiative sent a letter to companies on the Russell 3000, urging that they all disclose board racial/ethnic/gender data. Signed by over 20 investor organizations representing more than $3 trillion in assets under management and advisement, the letter waited until the end to note that many of the signatories “either have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement.”
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—AB 979, California’s board diversity law for “underrepresented communities,” faces taxpayer challenge
It didn’t take long. Crest v. Padilla (see this PubCo post), now has a sequel, Crest v. Padilla II. You might recall that, shortly after SB 826, California’s board gender diversity bill, was signed into law, three California taxpayers challenged the new law, filing Crest v. Alex Padilla I in California state court, 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 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.”