Enhancing racial and ethnic diversity is one of the most pressing issues facing companies, investors, and society. Although this has been a longstanding concern, racial inequity in the U.S. has recently been highlighted by both the disproportionate impact of the COVID-19 pandemic on minority communities and the killing of George Floyd at the hands of police officers. In response to these events, a number of investors have taken steps in the last year to promote racial equity through their voting and engagement policies and investment decisions.

Many investors have focused on companies’ hiring and employment practices. For example, a number of investors have requested that companies disclose more information about their workforce diversity. Calls for this type of information have grown increasingly louder in the last several years as evidenced by rising support for shareholder resolutions requesting that companies enhance their diversity disclosure. For example, on average, shareholder proposals on enhancing diversity disclosure received 55% support in 2020, up from 43% and 39% in 2019 and 2018, respectively. While one such proposal received majority shareholder support in 2019, more than half of the proposals submitted to a vote in 2020 were approved by shareholders.

Investors interested in promoting diversity, equity, and inclusion have looked to boards of directors to ensure that diversity is promoted within their organizations and also modeled in their members. While many of these investors have promoted board gender diversity through voting policies and through their corporate engagements, the conversation has rapidly expanded to include the promotion of racial and ethnic diversity on boards. In response, there have been a number of initiatives from investors, market participants, and regulators aimed at improving the representation of racial and ethnic minorities on boards.

In September 2020, California Governor Gavin Newsom signed a new law requiring companies headquartered in the state to include at least one director from an underrepresented community by the end of 2021. One year later, the law will require boards with four to nine members to have two people from underrepresented communities, and those with more than nine members to have at least three people from such communities. This law comes two years after California signed into law a similar bill aimed at enhancing the gender diversity on boards with the hopes to model its early successes. An October 2020 progress report found that the number of women on California corporate boards increased by 66.5% since the law was signed and it is likely that nearly 2,000 additional public board seats will be filled by women by the end of 2021.

A more recent effort, however, has the potential to affect significantly more publicly-traded companies. In December 2020, Nasdaq proposed new listing rules that would require all companies listed on its U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their boards. The rules would also require most Nasdaq-listed companies, on a comply-or-explain basis, to have at least two diverse directors, including one who self-identifies as a female and one who self-identifies as either an underrepresented minority or as LGBTQ+. The rule would give companies one year after its approval from the SEC to comply with the disclosure requirement, and two years to have, or explain why they don’t have, at least one diverse director.

These initiatives are a natural extension of shareholders’ focus on enhancing board gender diversity. However, unlike gender diversity, investors looking to incorporate more racial and ethnic diversity considerations in their voting and engagement policies can face significant difficulties. While the gender of directors can often be determined readily by the pronouns used by companies in director biographies, there is no standardized or reliable information concerning the racial composition of boards. Though some companies have begun to disclose more information on this topic, many still are silent on the issue, forcing investors to make assumptions based on photographs or last names in order to ascertain what level of racial diversity is on a given board. In fact, based on Glass Lewis’ analysis of companies’ disclosures on this topic, we found that in 2020, only one-half of companies in the S&P 500 disclosed some level of information concerning the diversity of their boards, and only 30% provided any specific information concerning the racial composition of their boards.

Given this dearth of information, it can be challenging for investors to implement consistent and accurate voting policies that address a board’s racial and ethnic composition. Moreover, there is some truth to the notion that what gets measured gets managed. A lack of information has made it difficult to even establish a reliable baseline for the numbers of racially and ethnically diverse directors among a given subset of companies, without which tracking progress in this area can be problematic. Moreover, it could be argued that companies’ lack of disclosure of this issue deprives shareholders of an important accountability mechanism, as explicit disclosure of the composition of the board allows shareholders to reliably track a company’s progress (or lack thereof) over time.

Understanding the importance of ensuring that companies are effectively managing issues related to board diversity, and of shareholders having reliable information concerning this critical issue, we believed that it was important to tackle the crux of the issue, a lack of consistent disclosure. As laid out in our 2021 U.S. Proxy Voting Guidelines, we have included an assessment of such disclosure in the proxy statements of companies in the S&P 500, with a view to expand the universe of companies included in this assessment in the coming years. Specifically, we are looking to see how a company’s proxy statement presents the following:

  • the board’s current percentage of racial/ethnic diversity
  • whether the board’s definition of diversity explicitly includes gender and/or race/ ethnicity
  • whether the board has adopted a policy requiring women and minorities to be included in the initial pool of candidates when selecting new director nominees (aka “Rooney Rule”) and
  • board skills disclosure.

We do not intend to make any vote recommendations on the basis of this disclosure during the 2021 proxy season. We will, however, be considering companies’ disclosure when assessing their overall governance, and it may be a contributing factor in our recommendations when additional board-related concerns have been identified. You can find more information about our approach to assessing diversity disclosure here.

Investors’ expectations around board diversity are still evolving. Meeting those expectations can be a moving target for companies – but that uncertainty only underlines the importance of enhancing disclosure to provide a clear understanding of how they are promoting appropriate levels of racial and ethnic diversity among their workforces and boards of directors. In line with these evolving expectations, Glass Lewis will also be carefully monitoring this issue and will update our board composition and disclosure requirements accordingly.