Diversity on the Board

Shareholder proponents have been keenly interested in making the corporate boardroom more diverse for reasons of both equity and performance. Now that more and more companies have agreed to change their board nominee procedures, the number of filings has fallen (chart left). To date, there are 30 proposals and a few more may emerge. The NYC pension funds are continuing an effort started last year specifically seeking more diversity for CEOs when companies conduct external search.

The 30 Percent Coalition continues to coordinate resolutions and work in other ways to diversify boards. The coalition’s members include senior business executives, civil society groups, institutional investors, corporate governance experts and board members themselves. The proposals ask companies to add more diversity to boards and report on how they manage this process. As the table illustrates, many of the target companies now are smaller, less commonly known firms. In the last 10 years, proponents have filed nearly 300 proposals on board diversity, withdrawing about 60 percent of them after companies agreed to be more inclusive. Proponents are most likely to file proposals at companies with no women or people of color on the board, but increasingly they seek expanded representation even where there are one or two diverse board members.

Two of the main types of proposals are longstanding.
One seeks a requirement that diverse candidates be
included in the selection process, based on the “Rooney Rule” concept that aimed to diversify National Football League coaching. These proposals typically ask the company to:

adopt a policy for improving board and top management diversity (the "Policy") requiring that the initial lists of candidates from which new management supported director nominees and chief executive officers ("CEOs") recruited from outside the company are chosen by the board or relevant committee (each, an "Initial List") should include qualified female and racially/ethnically diverse candidates. The Policy should provide that any third-party consultant asked to furnish an Initial List will be requested to include such candidates.

The other type of resolution asks for reports, asking how companies will enhance board diversity beyond current levels, such as:

1. Strengthening Nominating and Corporate Governance policies by embedding a commitment to diversity inclusive of gender, race, ethnicity;

2. Commit publicly to include women and people of color in each candidate pool from which director nominees are chosen;

3. Report on its process to identify qualified women and people of color for the board.

Withdrawals—As of mid-February, proponents had withdrawn five of the policy adoption proposals and four of

the reporting resolutions (see table), after companies agreed to the proposals.

SEC action—Easterly Government Relations says the proposal is moot since it has added diversity language to its nominating committee charter. The company challenged the proposal at the SEC, arguing it is moot (Rule 14a-8(i)(10)). At IPG Photonics, the proponent withdrew before any SEC response, noting the company has appointed two women to its board and changed its selection process.

At National HealthCare, the proposal is a resubmission that earned 59.2 percent in 2020. The company unsuccessfully challenged the resolution and NYSCRF withdrew before any SEC response. The company did amend its nominating committee charter to add consideration of nominees’ race, ethnicity and gender, but it did not commit to including such candidates in candidate pools nor disclose these characteristics for its board, as the proposal requested.

CEO diversity: The NYC pension funds have continued with a new type of resolution that focuses on CEO diversity. It has been filed at eight companies (see list; at least one is planned for the fall) and asks the company to

adopt a policy for improving board and top management diversity (the "Policy") requiring that the initial lists of candidates from which new management supported director nominees and chief executive officers ("CEOs") recruited from outside the company are chosen by the board or relevant committee (each, an "Initial List") should include qualified female and racially/ethnically diverse candidates. The Policy should provide that any third-party consultant asked to furnish an Initial List will be requested to include such candidates.

Board Oversight

The number of proposals about ESG board oversight fell dramatically in 2020, with just 10 filed as of mid-February compared to two dozen in 2019. This year there are only eight. Resolutions about board oversight fall into two functional categories—suggesting specific types of committees are needed to properly oversee complicated sustainability issues (five, compared with six last year and 16 in 2019) or asking for the nomination of specific types of experts to sit on the board (three, all resubmission from last year).

Workplace equity oversight: New this year is a proposal from NYSCRF and Domini Social Investments at four companies. It each asks for a report on

if, and/or how, the Board plans to strengthen its oversight of workforce equity issues by assigning responsibility for oversight to an existing or new board committee. For purposes of this proposal, "workforce equity issues” include racial and gender pay equity, employment discrimination, diversity and inclusion, and the relationship between compensation and benefits provided to senior executives and those provided to the rest of the workforce.

Domini withdrew after Disney agreed that its board Compensation Committee will examine workforce equity and says the Head of Human Resources will report on related issues at least annually.

Climate change oversight: Green Century withdrew a proposal after Texas Instruments agreed to address climate risks material to its business in its next sustainability report. The company had challenged the resolution at the SEC, arguing it has been implemented and relates to ordinary business. The withdrawal came before any SEC response. The resolution requested that the company “take steps to establish comprehensive board oversight of the Company’s climate change policies and programs and report to shareholders on steps taken or planned toward this within a time frame deemed reasonable by the board.”

Human rights expert: Arjuna Capital withdrew resubmitted proposals about human rights oversight at three of the big social media companies. It is pending at Alphabet (9 percent last year), Facebook (3.7 percent) and Twitter (omitted in 2020 because it arrived too late. The proposal asks each company to nominate for the next Board election at least one candidate who:

• has a high level of human and/or civil rights expertise and experience and is widely recognized as such, as reasonably determined by Alphabet’s Board, and

• will qualify as an independent director within the listing standards of the New York Stock Exchange.