Shareholders urge companies to deliver on diversity promises
The year 2021 is shaping up to set records for diversity proposals at annual meetings of American companies.
Nine in ten investors last month backed an appeal to International Business Machines Corp. to produce an annual diversity report. Five other companies, including renewable energy company First Solar Inc. and chemicals giant DuPont de Nemours Inc., saw more than 80% of shareholders support the diversity proposals.
A year after George Floyd’s death galvanized protests against racial injustice, the same cultural pressures that prompted hundreds of the world’s largest companies to pledge changes to their business operations to support racial equity are now fueling numbers without precedent of board proposals designed to ensure they keep their word.
“We are seeing a shift in investor sentiment,” said Kristin Hull, founder of Nia Impact Capital, an investment fund that originally filed IBM’s proposal. IBM’s decision is the result of many conversations, she said. Having that deal in hand with a bigger company like IBM, which is seen as progressive, makes it easier to persuade other companies to take initiatives more seriously, Hull said.
Shareholders submitted a record 37 diversity proposals, and they averaged 43% support on Friday, according to Bloomberg Intelligence. Two proposals from Union Pacific Corp. each garnered over 80% of shareholder support, while an American Express Co. got 60%. The ratio could change even more during the remainder of the so-called proxy season, when public companies face additional shareholder votes in the coming months.
Until June 2020, companies’ efforts on diversity were mainly focused on gender. Now, the pressure has intensified on companies to racially diversify their workforce – from senior executives to core employees. Asset management giants BlackRock Inc. and Vanguard Group Inc. said last year they would vote against directors of companies who do not act. Leading proxy advisory firm Institutional Shareholder Services has said that next year it will recommend voting against directors of any Russell 3000 or S&P 1500 companies with insufficiently diverse boards.
Institutional Shareholder Services has already recommended a vote against key directors on boards without women – one of many initiatives that have helped improve the number of women on boards, said Marc Goldstein, chief executive officer. of American research at ISS Governance. He said Institutional Shareholder Services estimates that there are around 894 boards on the Russell 3000 and 28 among the S&P 500 that are still lacking a diverse membership. While most diversity proposals still don’t get a majority vote, when support reaches 30% boards of directors often begin to engage with investors to avoid electoral defeat.
“There is a new sense of urgency,” Goldstein said.
Just two years ago, some companies didn’t understand that they were being asked questions about their corporate diversity and why it was important, said Meredith Benton, founder of Whistle Stop Capital in San Francisco. Benton, a sustainability advisor who has been involved in shareholder engagement for two decades and coordinated several of this year’s diversity proposals, said many companies are scrambling to catch up.
“These conversations have been fast and furious, more so than any other ESG issue,” she said, citing Ulta Beauty Inc. and Capital One Financial Corp. as being more open than others. “Many companies are ready to get involved, and they also understand that this is an issue that needs to be discussed at the board level.”
The first sign of change in sentiment appeared last year. A proposed diversity report from network security company Fortinet Inc. received 70% approval on June 19, which bodes well as it is the holiday known as Juneteenth, which marks the anniversary of the order of a Union general in 1865 that freed slaves in Texas.
IBM released diversity data in the first half of 2020 and told employees in October that it would release the information annually, the company said in a statement. This year’s report was released in April, shortly before the annual meeting, so there was no reason to oppose the Nia Impact proposal, IBM said. The company will release more details in 2022 after completing the split of a unit, IBM said in the statement.
Another major change has been the number of companies willing to publicly share detailed workforce data by race and gender that they report annually to the U.S. Equal Employment Opportunity Commission. This information, known as EEO-1, is private unless it is voluntarily disclosed. In a Bloomberg survey of S&P 100 companies in June 2020, only 25 agreed to disclose their EEO-1. By October, that number had grown to 68 companies that already had or were willing to disclose this year or shortly thereafter. At this year’s shareholder meetings, three companies received proposals to disclose their EEO-1 data. The resolutions obtained a majority of votes in two companies.
Racial audits have emerged as a new shareholder proposal. It is an independent analysis of a company’s business model to see if, and how, it causes or perpetuates racial discrimination. Although they were not adopted, those filed in companies such as Johnson & Johnson and JPMorgan Chase & Co. won more than a third of the votes. That’s high enough that companies are likely to face increased pressure to accept future exams. A racial audit proposal filed with BlackRock Inc. was withdrawn after agreeing to perform one.
Most companies still resist diversity proposals. Among the reasons some data cast it in a negative light, said Natasha Lamb, managing partner at Arjuna Capital, which researches detailed salary data on median wage gaps for women and people of color at large U.S. companies. So far, only Citigroup Inc., Starbucks Corp. and five other companies have accepted such proposals in the United States, she said. The same disclosure is mandatory in Great Britain.
“I think some topics are more difficult than others, frankly,” Lamb said, adding that a more general report or audit may be easier to publish than specific compensation and race information that shows a great disparity.
This month, Nike Inc.regulators to block a shareholder proposal asking the sportswear maker to publish annual reports on its diversity measures. The declarant, As You Sow, a nonprofit shareholders’ advocacy group, said Nike had faced allegations of harassment and discrimination based on gender and race, and was not providing sufficient data on the effectiveness of its diversity programs. It also does not publish its EEO-1 data.
Nike said it posted “comprehensive documents” on its diversity efforts on its website, that diversity was one of the three focus areas of its corporate goals last year, and that it aimed for racial and ethnic minorities to make up 35% of its American businesses. workforce by 2025.
As more and more information about the diversity sought in proxy votes becomes public, the next challenge will be to process all the data so that it is comparable across companies, industries and geographies, Paul said. Washington, head of ESG at the Conference Board, a research group in New York. “And it’s going to take some time to digest,” he said.