Investors Need Data to Make Diversity a Reality

August 24, 2020

Investors Need Data to Make Diversity a Reality

08/24/2020

Gwen Le Berre


Gwen Le Berre

Director, Responsible Investing

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Ahead of Women’s Equality Day, we take a look at how far women have come in corporate America and how investors can track progress on gender and race.

It’s hard to believe that women earned the right to vote in this country a mere 100 years ago. Women have come a long way with a record number in Congress and Senator Kamala Harris on the Democratic presidential ticket. However, there’s still a long way to go in boardrooms when only one out of five directors of the Russell 3000® are women. As recently as five years ago, men named John, Robert, James, or William held more seats on corporate boards than women of any name.


The statistics about ethnic-minority representation on corporate boards are even bleaker: 37% of S&P 500® companies don’t have a single black director. In a year when social and economic inequality has made more headlines than ever, no company can afford to keep sitting on its hands. With Women’s Equality Day just ahead, let’s take a look at where we are, where we’re going, and how we can get there faster.


Why does diversity matter?

Diversity of perspective is a key element in deciding how to balance business risks and opportunities. Although diversity of skin color, gender, religious view, economic background, sexual orientation, or physical ability isn’t the same thing as diversity of perspective, it can still be a leading indicator. These characteristics shape an individual’s life experience, and such life experiences can be vital when making decisions that affect a company’s workforce, customer base, and community. When everyone around the table has similar experiences it’s easy to fall victim to groupthink and make suboptimal decisions.


For those focused on indicators of good governance, board homogeneity can be a signal of weak recruitment and retention efforts. Worst of all, it suggests a company holds the false belief that leadership qualities are confined to a select group of people instead of being spread throughout the population.


Diversity data: Some for women, very little for minorities

The SEC doesn’t require companies to disclose the gender composition of their board members. However, data vendors can track these statistics easily. This isn’t the case when it comes to the race of individual directors; we can hardly expect data vendors to assess the race or ethnicity of individual directors by examining their boardroom headshots.


Investors looking for corporate diversity data beyond boardroom composition are also likely to be very disappointed. Because disclosure isn’t mandatory, the data tends to be sparse. As a matter of fact, almost 72% of US companies with more than $2 billion in market capitalization don’t disclose how many employees are female—let alone the levels of racial or gender diversity at each seniority level—which would be helpful in assessing how companies retain and promote their minority and female employees.


Companies with over 100 employees already track and report this type of data to the federal government’s Equal Employment Office as part of the Consolidated EEO-1 Report. However, very few of these companies publicly disclose these reports. This would give investors and the larger public a comprehensive breakdown of a company’s workforce by race, ethnicity, and gender according to 10 employment categories, including representation in senior management.


When data is available and accessible, we see companies manage the issue more closely and show some progress. Women now hold about 22% of board seats at companies listed on the Russell 3000, up from 17% in 2018. Approximately 7% of companies in the Russell 3000 still have all-male boards, down from 16% a year ago. Both of these statistics indicate that progress is accelerating. At this growth rate we should see gender parity on Russell 3000 boards by the year 2030.

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How can investors encourage diversity?

Investors have several avenues to encourage companies to be more proactive in adding women and minorities to their boards, including the proxy voting process. Shareholders have filed proposals in recent years that call for boards to adopt a policy to include at least one woman or one minority candidate in the initial pool of applicants for an open board seat. This concept was adopted from the NFL’s Rooney Rule, which requires league teams to interview ethnic-minority candidates for head coaching and senior football operation jobs. Few of these shareholder proposals are filed every year, but investors should consider supporting them when they’re on the agenda.

 

Some institutional investors have taken a more assertive approach to improving board diversity by voting against the nominating chair or the entire nominating committee. This is a bold way to emphasize the importance of inclusion, potentially impacting a much broader universe of companies. Research from the EY Center for Board Matters shows that chairs of nominating committees at S&P 1500® companies with all-male boards have seen more than twice as many shareholders oppose their reelections in the past three years. 


Institutional investors that are keen on making a more deliberate impact can go beyond voting against directors whose boards lack diversity. They can leverage shareholder engagement to explain their reasoning to the boards or nudge companies to start publicly disclosing their EEO-1 disclosure data. Instead of waiting for state or federal mandates, companies should proactively showcase their work to improve representation in their ranks. A board bears the ultimate responsibility for promoting a thriving company culture and setting an example for the rest of the organization. This can’t happen when the board holds back information.


The bottom line

It’s easy for companies to make bold statements about their support for women and minorities. But investors shouldn’t be content with hashtags and one-time donations. To get on the path toward true equality, companies must be willing to ask tough questions about what they’re doing to attract and keep a diverse workforce at all levels. We can’t know how deep a problem runs unless we start looking.



 

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