Pressure from investors and other stakeholders is putting a new focus on diversity at board and employee level. Governance leaders can do a lot to help improve representation and how their firm communicates around that work, finds <I>Ben Maiden</I>
Diversity and inclusion will feature prominently in the thinking of many corporate leaders and investors in 2021. That means corporate secretaries and general counsel will have an important role to play in advising boards, finding candidates and devising disclosures that will help shape narratives on a key set of issues.
The protest movement sparked by the disproportionate impact of the Covid-19 pandemic on people of color and the deaths of African Americans at the hands of police officers has shone a renewed spotlight on racial injustice and inequity, and led many companies to issue statements of support for social justice. But investors are pressing companies to take other specific actions to improve diversity within their organization, or at least to report on who makes up their board and workforce.
For example, State Street Global Advisors’ (SSGA) global chief investment officer Richard Lacaille wrote to board chairs in late summer explaining that from 2021, SSGA will ask portfolio companies to explain their risks, goals and strategy relating to racial and ethnic diversity and to make relevant disclosures. SSGA aims to tackle these issues via engagement. ‘[But] if required, we're prepared to use our proxy voting authority to hold firms accountable for meeting our expectations,’ Lacaille wrote.
Perhaps the most obvious change has come from a campaign launched by New York City comptroller Scott Stringer on behalf of the city’s public retirement systems. In July Stringer sent letters to the CEOs of 67 S&P 100 companies urging them to disclose data that would enable investors to measure the success of their diversity and inclusion practices, which he described as fundamental to the creation of long-term shareowner value.
He later announced that 34 of those companies had agreed to release data on the composition of their workforce by race, ethnicity and gender from their annual EEO1 report. Companies must already file these reports with the US Equal Employment Opportunity Commission and some investors have for decades been asking them to release it, but they have largely met resistance until now. Stringer’s office said that, as of late September, 29 US public companies were disclosing their EEO1 report, of which only 14 were in the S&P 100. The campaign increased that number to 48 S&P 100 companies.
Meredith Benton, Whistle Stop Capital
A new California law is also moving the ball forward. It will require all public companies with headquarters in the state to have a minimum ratio of members from under-represented communities starting December 31, 2021 and then new ratios from December 31, 2022. It defines a director from an under-represented community as ‘an individual who self-identifies as black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.’
Where governance pros come in Governance professionals recognize that general counsel and corporate secretaries are generally not decision-makers when it comes to picking new directors or recruiting across companies as a whole. But they see a number of ways in which they can play a role in helping boost diversity. One is through aiding compliance with laws such as the recent California legislation.
Belinda Martinez Vega, partner with law firm Venable, says general counsel will need to look at their company’s by-laws to determine what criteria they carry for board members, whether the board will need to be expanded to meet the law’s requirements and what special actions they may need to take. The law is expected to face legal challenges from critics who argue that it is unconstitutional for creating a mandatory quota related to race and sexual orientation. But Vega says she expects that once processes are in place to comply, companies will continue to do so while any challenges play out.
General counsel are also seen as having the potential to influence diversity progress through their work alongside boards. ‘The general counsel or chief legal officer of a public company should take a leading role and lean in to recommend diverse board membership,’ says Jean Lee, president and CEO of the Minority Corporate Counsel Association (MCCA). General counsel take part in talks with investors alongside directors and CEOs, particularly on social and governance issues, and can therefore help shape how the company responds to those issues, she adds.
More directly, general counsel can advise boards on the benefits of diversity and can help source potential director candidates, Lee says. She comments that addressing the issues is not simply about recruiting a couple of diverse board members, but also involves thinking about what type of company the board wants it to be.
Similarly, WomenCorporateDirectors Foundation CEO Susan Keating says she is hearing from directors that their companies are redefining their futures and rethinking their workforces. This creates an opportunity for general counsel and corporate secretaries to ensure that in guiding policies they embed specific actions to increase diversity on boards and among employees, she says.
For example, there needs to be a policy defining what the company means by diversity and the communities the company serves – and that the board should represent – Keating explains. There also need to be policies around nominating and governance committees setting out how they define a slate of director candidates and how many need to come from under-represented communities.
Rose Marie Glazer, senior vice president, corporate secretary and deputy general counsel of American International Group (AIG) also notes that general counsel or corporate secretaries can influence board searches, adding that her team puts forward only diverse slates. Candidates need to be qualified, but the point is that a slate will be more qualified if it is sourced diversely, she adds: ‘Recruiters have their own stable of candidates and we have to push the envelope.’
Jean Lee, MCCA
Mary Francis, Chevron Corporation’s corporate secretary and chief governance officer, says the company these days looks at a broader range of people than just CEOs as potential board candidates. Some observers have raised concerns about the pool of CEOs and other traditional candidates that companies seeking to comply with the new California law can choose from. But Francis says Chevron is already in compliance with the law and had been throwing a wider net before, in part to avoid investor concerns around overboarding.
The search for diversity goes beyond the boardroom, of course, and general counsel and corporate secretaries can help promote diversity among their company’s vendors, Glazer notes. General counsel at 12 major financial institutions including JPMorgan Chase, Bank of America and Goldman Sachs in September issued an open letter in which they committed to gaining a deeper understanding of the progress the law firms they hire are making in advancing racially and ethnically diverse employees and including that data in the factors they consider in selecting external counsel.
‘At the inception of new matters or upon review and renewal of panel determinations, we will meet with our law firm partners to discuss appropriate staffing, including [using] diverse teams of legal professionals on our matters,’ they wrote.
Governance leaders also need to look at diversity when hiring members of their own teams, Glazer says. She adds that doing so holds up a mirror to boards: ‘We aren’t the decision-makers, but we are influencers.’ She believes directors have a shelf life with a specific company, and although she is unsure of the value of term limits, she says it is healthy to have rotation and a mix of directors who have been on the board for different periods of time to mix experience with fresh perspectives.
Glazer also says general counsel – more so than corporate secretaries – can be a vocal proponent for diversity at the executive level, not just in terms of the legal and human relations functions but also in business positions. A lack of diversity in the C-suite creates a less diverse pipeline of potential board members, she notes.
Moving to disclosure Disclosure of diversity data is another area where general counsel and corporate secretaries have a role to play. ‘I’m a believer that you won’t make progress if you don’t measure,’ Glazer says, adding that reporting and measuring progress are necessary to hold companies accountable.
At the MCCA, Lee says general counsel can push for disclosures such as the EEO1 report. Even without the success of Stringer’s campaign, there is a sense among governance professionals that a tipping point has been reached or is imminent.
Meredith Benton, principal and founder of Whistle Stop Capital, a consultancy focused on increasing social and environmental best practices in investment portfolios, notes that there has been a very quick shift in investor expectations around presenting the EE01 report. She says companies’ response to investors requesting diversity information has gone from ‘Why are you asking?’ to ‘What data do you want?’
Companies have in the past worried that if they were one of the few to release the data, they would become a target for lawsuits. That becomes less of a concern as more firms disclose diversity data.
Another concern for companies in releasing EEO1 data is that it is based on a standardized set of metrics and therefore does not give a full picture of where a company may stand in terms of diversity. Glazer, for example, notes that it covers only the US and not AIG’s global operations. Although she is not opposed to issuing the data, she views it as a start, not an end-point. AIG, one of the companies to receive a letter from Stringer, already presents summary information but will start releasing the full EEO1 report in March 2021.
Chevron is another company that agreed to release EEO1 data after hearing from the comptroller. Francis considers this the right thing to do and says there hadn’t been a reason not to release the information previously, although she says the format doesn’t map onto the company.
Benton recommends that companies release EEO1 data alongside other information in areas such as promotions, retention and recruitment, which she says offer better insight into a company’s progress on diversity. She also says narrative is essential to set data in context, and one step general counsel can take is to ensure the company explains where it is on diversity, what it plans to do to improve things and what its goals are. By doing so, the company can control its own story, she explains.
Benjamin Colton, global co-head of asset stewardship at SSGA, has a similar view. ‘The conversations have been great so far’ since Lacaille’s letter was sent, he reports. He also sees the value in more holistic data than simply the EEO1 report. SSGA doesn’t expect companies to be where they want to be on diversity – but it does expect them to have a roadmap of where they want to be, he says.