Board diversity has been a major focus for investors over the last 4 years or so—increasing representation of women and people of color but also demanding disclosure of diverse characteristics and policies promoting opportunities for diverse candidates.
For example, in State Street’s latest proxy voting and engagement guidelines:
- We expect the boards of companies in the following indices to be composed of at least 30-percent female directors: Russell 3000, TSX, FTSE 350, STOXX 600, ASX 300
- We may withhold support from the chair of the nominating committee when a company in the S&P 500 or FTSE 100 does not have at least one director from an underrepresented racial/ethnic community on its board.
- If a company in the Russell 1000 or FTSE 350 does not disclose the gender, racial and ethnic composition of its board, we may vote against the Chair of the nominating committee. Acceptable disclosures include: Aggregate-level (e.g., “5% of our Directors are Black”, “Seven of our Directors are people of color”, “30% chose not to self-identify”); or Individual-level (e.g., “Jane Doe is African-American, John Smith is Caucasian,” etc.)
- Articulate goals and strategy related to diverse representation at the board (including race, ethnicity, and gender, at minimum), including how the board reflects the diversity of the company’s workforce, community, customers, and other key stakeholders.
BlackRock has similar, slightly different guidelines:
- In the U.S., we believe that boards should aspire to at least 30% diversity of membership, and we encourage large companies, such as those in the S&P 500, to lead in achieving this standard. In light of market developments, an informative indicator of diversity for such companies is having at least two women and a director who identifies as a member of an underrepresented group. We recognize that companies with smaller market capitalizations and in certain sectors may face more challenges. Among these smaller companies, we look for the presence of diversity and take into consideration the steps that companies are taking to ensure diversity on their board.
- In order to help investors understand overall diversity, we look to boards to disclose: The process by which candidates for board positions are identified, including whether professional firms or other resources outside of incumbent directors’ networks are engaged to identify and/or assess candidates, and whether a diverse slate of nominees is considered for all available board nominations; How diversity, including professional characteristics and demographic factors, is considered in board composition, given the company’s long-term strategy and business model
- We ask boards to disclose how diversity is considered in board composition, including professional characteristics, such as a director’s relevant industry experience, specialist areas of expertise and geographic location; as well as demographic characteristics such as gender, race/ethnicity, and age.
Many other stakeholders have pushed for change at the board level through engagement and shareholder proposals, and largely as a result of these campaigns there has been significant improvement across the board.
S&P 500 boards are now more than 50% diverse based on gender or race/ethnicity, with women comprising nearly 35% and people of color making up nearly 25%:
Nearly 99% of S&P 500 companies now disclose the aggregate race/ethnicity of their boards and 45% identify the race/ethnicity of each individual board member, up from 46% and 6% respectively in 2020.
And 55% of S&P 500 companies have a commitment to a diverse slate of nominees when recruiting new board members (aka ‘Rooney Rule’).
The policies and practices of the largest companies have started to filter down to smaller companies, which are now facing similar expectations. Many of our clients are beginning their planning for next shareholder season, and we are helping them identify targets for engagement based on different variations of this criteria.
A simple screen of S&P 500 companies with less than 30% overall diversity based on gender or race/ethnicity returns 11 companies (note that there were 80 companies that fit this criteria at the end of 2020).
Six of the eleven have board diversity policies and four have better board disclosure scores than the overall S&P 500 (43.5). Baker Hughes has a member that identifies as Middle Eastern/North African and lost a black woman that stepped down a few months ago. Catalent lost 4 diverse members (3 women and an Asian man) earlier in 2024, and is being acquired by Novo.
As we continue our expansion towards coverage of the Russell 3000 and beyond, go deeper when it comes to self-identified diversity characteristics (we already include LGBTQ+ and veteran, and are expanding to include disability), and include more qualitative information (mandatory retirement age, term limits), we are empowering our clients to have meaningful engagements with nearly the entire investable universe in the US.
Plus, what we’re reading this week:
- Moving Beyond ESG: The framework has its detractors. Here’s a new playbook for responsible business. (Harvard Business Review)
- Harley Drops Diversity Efforts Maligned by Activist (Bloomberg Law) and Jack Daniel’s Maker to End Executive Pay Link to DEI Targets (Bloomberg Law)
- Corporate boards brace for DEI backlash (Axios)
- BlackRock support for ESG shareholder resolutions hits fresh low (Reuters)
- The ‘sustainability recession’ will end soon—and not by choice (Fortune)
- Why Gender Lens Investing May Lead to Better Returns (Morgan Stanley)
- For Anti-DEI Groups Swarming Annual Meetings, Even a Loss Is a Win (Bloomberg)
- Stakeholder Capitalism Still Makes Business Sense (Harvard Business Review)
- Companies Change How They Talk About Diversity Amid ESG Backlash (Bloomberg Law)
- How Corporate “Diversity Washers” Spin Investors (Stanford GSB)
- Companies Are Scaling Back Sustainability Pledges. Here’s What They Should Do Instead. (Harvard Business Review)