Firms nationwide are calling for board of director seats to be filled with diverse voices — but how do they tackle a problem that's decades in the making?
George Floyd’s death almost three months ago sparked a public outcry surrounding police brutality, but it also prompted corporations worldwide to come out with statements of support surrounding diversity and inclusion measures within their own organization. Eighty-eight of the firms in Fortune 100 released statements, ranging from messages of solidarity to outlines of organizational programming meant to address diversity. And while the outcry surrounding Floyd’s death has prompted a new wave of corporate diversity pledges, calls for diversity have been around for almost more than 20 years.
The past two decades have seen diversity become an important aspect of corporate governance policies. In the early 2000s, nonprofits and activist groups led the push for greater diversity, notably making a business case for gender diversity on boards of directors, tying greater diversity to a more profitable bottom line.
The SEC created official rules around diversity in 2009, requiring public companies to disclose three items in proxy statements: whether diversity was a factor in considering candidates, how diversity is considered in the nomination and hiring process and how the company assesses the effectiveness of its diversity policies.
Since then, a smattering of state laws have been passed to enforce representation on boards of directors. California passed legislation requiring firms to have at least one female director now, and will require three women on boards of six or more by 2021. New Jersey and Illinois have introduced similar legislation.
“There are increasing trends to inject boards with fresh talent — whether that be of varying ages, different orientations, genders, disabilities and so forth. As our culture and country evolve, so too must regulations to accommodate and make room for the makeup of our society,” says Kevin Fritz, labor and employment associate at law firm Seyfarth Shaw. “Regulations that measure or provide objective criteria for companies to implement more diverse board membership may indeed be a thing of the future.”
But most diversity isn’t happening because of legal requirements — it’s happening because of public pressure. Shareholders and activists are pushing firms toward more diverse leadership, including diversity of all types.
Asset managers like BlackRock and State Street, who typically have high voting power for companies in which they invest, have introduced policies requiring a diverse board in order for them to vote yes on board leadership. At State Street, if a firm does not meet board diversity guidelines, the firm votes against the chairman of a company’s board, or against the chair of the nominating and governance committee chair. Proxy advisory firm Institutional Shareholder Services similarly released guidance that it will vote against any board without a female director. The guidance went into effect this year.
The progress is valuable, but leaves ethnic and racial diversity behind, experts say.
“Unfortunately, far more states currently either mandate or encourage gender diversity compared to racial and ethnic diversity, and even where racial and ethnic diversity is included, often it comes as an afterthought,” said Kyla Miller, labor and employment associate at Seyfarth Shaw.
Miller noted a recent California bill that, if passed, will require California companies to have at least one person of color serving on their corporate boards by the end of 2021. The bill comes almost a year after the state passed legislation surrounding gender diversity.
In 2020 proxies, only 36 firms in the Fortune 100 disclosed ethnic and racial diversity. For those firms, only 24% of each board were racially or ethnically diverse, at the median.
So what can firms do to increase diversity on their board?
In 2018, Progressive reached 50% gender parity, and has maintained a board comprising 50% or more women since. Board chairperson Lawton Fitt advises companies to keep their options open when looking for new board members.
“Be intentional and think broadly,” Fitt says. “The skills, knowledge and judgment that are needed around the board table can be gained in a variety of roles and settings. Keep your eyes open. We have found excellent board members in a wide variety of settings.” Fritz notes that typically, directors rely heavily on their own social network when searching for board nominees, leading to a board that can be particularly homogenous.
According to Victoria Westerhaus, partner at law firm Bryan Cave Leighton Paisner, the pressure for diversity will only continue to mount in coming years as environmental, social and governance (ESG) criteria continue to become more important to shareholders.
“[This has become a broad issue] as it’s evolved through the years,” Westerhaus says. “Investors, proxy advisors and activists are demanding change and now they’re leveraging litigation and legislation.”
Westerhaus points to Goldman Sachs, who announced that they won’t take firms public if they don't have at least one diverse board member, or Oracle, who is being sued by an investor because of lack of diversity on its board.
“The pandemic has strengthened social connectedness through technology and networking,” Fritz says. “Going forward, the new normal may include guidelines to cast a wide net to build a network that includes institutions, influential companies, investors and individuals who can have an accelerating effect on board diversity.”
