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Aug 19, 2020

Coalition offers blueprint for boosting board diversity

Pressure for change has intensified in part from the unequal effects of Covid-19

Several groups have come together to urge US companies to increase diversity on their boards and present a framework for how such change can be achieved.

The Diverse Corporate Directors Coalition (DCDC) cites a 2018 McKinsey report as stating that companies in the top quartile for ethnic diversity were 43 percent more likely to see above-average profitability. But it also points to a 2018 review of Fortune 500 companies as finding that from 2010 to 2018 the representation on corporate boards by people of color only increased from 12.8 percent to 16.1 percent.

This slow pace of change has been one prompt for the coalition to issue its call to action. ‘The current social unrest in our country calls for proactive, vigilant leadership working toward achieving comprehensive and measurable results,’ John Rogers of the Black Corporate Directors Conference (BCDC) and chair, co-CEO and chief investment officer of Ariel Investments, says in a statement.

‘Today, more than ever, it is imperative that corporate boards reflect the diversity of our nation if we are to address systemic racism and inequities, a goal that will also benefit business performance.’

Board diversity has been gaining ground as a governance topic in recent years, but the outsized impact of the Covid-19 pandemic among people of color and the widespread outcry over the deaths of George Floyd and other African Americans at the hands of police officers have pushed issues of racial equality to the forefront of political and corporate discourse – in addition to investing and stewardship.

For example, the Racial Justice Investing Coalition – a group comprising 112 asset managers, owners and corporations – in June issued a statement laying out five actions the signatories will take in the future:

  • Commit to actively engage with, amplify and include black voices in investor spaces and company engagements
  • Commit to embed a racial equity and justice lens into our own organization
  • Commit to integrating racial justice into investment decision-making and engagement strategies
  • Reinvest in communities
  • Use the investor voice to advance anti-racist public policy.

Among other developments, a group of senior Canadian businesspeople in June launched a new council and initiative aimed at increasing racial diversity among the country’s boards and executive teams.

‘With the pandemic impacting the economy and people’s lives – disproportionately impacting the lives of people of color – we believe that today, more than ever, it is time for companies to demonstrate their commitment to diversity, equity and inclusion [DE&I] by accepting accountability and taking positive action,’ Esther Aguilera, CEO of the Latino Corporate Directors Association (LCDA), says in announcing the DCDC call to action.

The DCDC is composed of representatives from associations that support diverse corporate directors: Ascend Pinnacle, the BCDC, the LCDA, Out Leadership’s Quorum and the WomenCorporateDirectors Foundation.

The coalition’s call to action centers around three principles: policy, practice and accountability. In terms of policy, the DCDC asks board members to embed items in their company’s governance policies reflecting a commitment to DE&I. These might include:

  • Adding a governance guideline stating, for example, ‘We establish, refresh and actively work to achieve board equity goals with respect to race, ethnicity, gender, sexual orientation and other aspects of diversity in the context of company strategy and stakeholder expectations’
  • Reporting on the board’s composition, based on the self-identity factors, in the company’s proxy statement and other applicable SEC filings
  • Tracking their own diversity against their goals and against the company’s peer group, industry and all public companies.

In terms of practice, the DCDC calls for boards to work toward achieving at least 50 percent of directors coming from under-represented groups. In doing so, it outlines steps it says have been used successfully by companies and recommended by experts, such as:

  • Adopting an updated Rooney rule stating that 50 percent of director candidates interviewed should be diverse, with a significant portion selected to include members of underrepresented subgroups that are not present on the board
  • Where boards are composed of only white men and women, having nominating/governance committees ask for a candidate pool that is 100 percent racially and ethnically diverse
  • Examining routinely-used search terms that are unnecessary and exclusionary
  • Setting expectations with search firms from the start and being prepared to stop using recruiters who don’t provide a candidate pool that is sufficiently ethnically and racially diverse.

As for accountability and impact, the coalition says companies and directors should expect more pressure from shareholders, the community, customers and employees for change in the boardroom but in organizations and society as a whole. It outlines potential actions boards can take, including:  

  • Inspiring companies to set ‘aggressive and comprehensive plans to achieve measurable equity at all levels of the organization’
  • Encouraging inclusive purchasing
  • Assessing the company’s engagement and investment in initiatives aimed at stopping racism and exclusion
  • Promoting honest assessments, by external parties if appropriate, of the company’s culture, workforce policies, purchasing practices and community investment.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...