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Boardrooms add diversity as Washington mulls disclosure rules

Lawmakers consider requiring disclosure of diversity status

Rep. Gregory W. Meeks, D-N.Y., introduced corporate diversity disclosure legislation that is now part of the House's fiscal 2023 defense policy bill.
Rep. Gregory W. Meeks, D-N.Y., introduced corporate diversity disclosure legislation that is now part of the House's fiscal 2023 defense policy bill. (Tom Williams/CQ Roll Call file photo)

Companies are making good on promises to add racially and ethnically diverse candidates to their boards even as Congress and the Biden administration debate whether to require them to disclose the demographic makeup of directors, executives and workers.

For the first time, all companies listed on the S&P 500 stock index have at least one racially or ethnically diverse director, according to data from proxy advisory firm Institutional Shareholder Services Inc. The number of non-diverse S&P 500 boards was at 11 percent as recently as 2020, and at 5 percent last year before hitting zero this year.

Russell 3000 companies also made major strides in improving racial representation. Some 90 percent of companies on the index had at least one director who identified as a minority this year, up from 73 percent last year and 70 percent in 2020. The biggest gains came in the share of companies that had at least two minorities on their board. Some 55 percent of listed companies had two or more diverse directors in 2022, nearly doubling from 29 percent in 2020.

The murder of George Floyd by Minneapolis police in 2020 and the reignited support for Black Lives Matter sparked greater demands for racial equity and meaningful action on diversity and inclusion, including in corporate America, said Fassil Michael, head of thought leadership at ISS Governance Solutions.

“As the ISS board diversity data shows, there has been visible progress since 2020 in the number of racially/ethnically diverse directors on U.S. company boards, and this uptick in diversity and inclusion initiatives has been dubbed by some ‘The George Floyd Effect,’” Michael said in a memorandum last month. 

The progress remains unevenly distributed among several demographic groups, the company noted. For example, directors identifying as Hispanic or Latino make up 5 percent of S&P 500 board seats despite representing 18.5 percent of the U.S. population. 

“Many boards still do not reflect the diversity of their customer base or the demographics of the broader society in which they operate,” Michael said. “While there is cause to celebrate the progress that has been made in recent years, many companies are expected to grapple with board diversity issues — along with C Suite diversity, workforce equity and fair pay — for the foreseeable future, as the long-term trajectory of many corporate diversity and inclusion initiatives has yet to be seen.”

Representation of women in corporate boardrooms is also improving, though they have yet to reach parity with men. About a third of S&P 500 directors are women, according to findings from executive search and leadership consulting firm Spencer Stuart. Nearly half of the incoming independent directors on S&P 500 boards are women. 

The findings come as legislators and regulators mull requiring U.S. public companies to disclose diversity information about board directors and management, along with that of their overall workforce.

The House-passed version of a fiscal 2023 defense authorization bill includes a provision for companies to disclose diversity metrics of board members and executives. The legislation incorporates an amendment from New York Democratic Reps. Gregory W. Meeks and Carolyn B. Maloney that would require public companies to disclose racial, ethnic, gender identity, sexual orientation and veteran status of board directors, nominees and senior executive officers.

The provision would direct the Securities and Exchange Commission’s Office of Minority and Women Inclusion to publish best diversity disclosure practices, as well as create an advisory group that would study and report on increasing corporate diversity. 

Congress has yet to decide whether the disclosure provision will be included in an eventual compromise defense policy bill. The Senate version of the fiscal 2023 defense policy bill doesn’t include a similar disclosure provision. The Senate has yet to vote on the bill. 

The provision is based on a bill from Meeks approved by the House Financial Services Committee last year. A spokesperson for Meeks didn’t respond to an inquiry about the likelihood of incorporating the congressman’s legislation into a finalized NDAA.

SEC agenda

Such disclosures are on SEC Chairman Gary Gensler’s mind. The SEC’s spring agenda includes separate items on board diversity and human capital management. There are dozens of potential rulemaking items the SEC may take up this year despite pressure from investors and advocacy groups to prioritize rules on diversity disclosure.

“An SEC disclosure rule on board diversity could potentially improve accountability by ensuring consistent and comparable information on boardroom diversity,” said Claudia Pici Morris, a consultant at Spencer Stuart. “We all know, what isn’t measured, isn’t managed. Consistent information across companies and sectors will allow boards, companies and stakeholders benchmark performance and set aggressive forward-looking goals.”

The world’s largest asset managers, including BlackRock Inc., The Vanguard Group Inc. and State Street Global Advisors, all updated their proxy voting policies this year to ratchet up pressure on companies to improve board diversity and better communicate about the backgrounds of those in the boardroom.

BlackRock now wants U.S. corporate boards to have 30 percent diversity in their membership and have at least two directors who identify as female and one who identifies as an underrepresented minority group. 

“We find it helpful when boards disclose how diversity is considered in board composition,” BlackRock, which manages $10 trillion in assets, said in an update on its proxy voting policies.

“Such disclosure may include a discussion of demographic characteristics that companies identify as being relevant to their business and market context such as gender, race, ethnicity, and age; as well as professional characteristics, such as a director’s industry experience, specialist areas of expertise, and geographic location,” it added.

Board diversity was the top reason BlackRock declined to support at least one director candidate at some companies’ annual general meetings this year. The firm decided to either cast votes against or withhold votes at 14 percent of U.S. companies due to their non-diverse boards, BlackRock said.

“Diversity in the boardroom contributes to more robust discussions, more innovative decisions, and better long-term economic outcomes for companies and our clients,” the asset manager said. “Diversity amongst directors is a means of promoting diversity of thought and avoiding ‘group think’. Diversity in the boardroom may also support diversity in executive leadership teams and a company’s workforce.”

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