There is not a corporate board in the United States that doesn’t understand the importance of diversity to business performance, decision-making, brand perception, and talent recruitment and retention. But do they want to report on it?
In the aftermath of this spring’s racial unrest, and against the backdrop of pledges by organizations to do better when it comes to diversity, Institutional Shareholders Services, one of the largest proxy advisors on corporate governance in the world, is asking boards to put their data forward. The firm wants boards to voluntarily disclose the ethnicity of directors so that it can measure progress on diversity at the director and senior executive level, potentially using the data to help it determine voting recommendations to shareholders on corporate governance issues.
Kyra Leigh Sutton, Ph.D, a faculty member specializing in workplace diversity at Rutgers University's School of Management and Labor Relations, says that if boards are going to hold management accountable for their diversity pledges, they have to begin by being willing to be held accountable for diversity among their directors. “If the CEO who made the pledge leaves, it is going to fall on the board to make sure those commitments and objectives move forward when new leadership comes in, and the only way to protect those interests is to be transparent about its strategy and purpose,” says Sutton.
To be sure, the info is not likely to be too flattering. While gender diversity has improved, years of efforts and promises on ethnicity changes have not produced much. For instance, while female executives held 22% of director positions on the boards of Russell 3000 companies, gaining seats for ten straight quarters, Black executives hold only 4% of the board seats. Even so, Jane Stevenson, vice chairman of Korn Ferry’s Board and CEO Services practice, says voluntarily reporting on diversity will provide important transparency on a topic that requires work. “People do what gets measured,” says Stevenson. “Having to report on diversity will likely motivate boards to ensure they have diversity to report on.”
Certainly, the momentum toward greater reporting is there. Beginning in July, Goldman Sachs will no longer take companies public unless they have at least one diverse board director, for instance, while Blackrock, Vanguard, and other institutional investors have called for greater board diversity for companies in which they invest. The U.S. Securities & Exchange Commission now requires companies to disclose whether self-reported diversity characteristics played a part in choosing candidates for board seats, and under a new Illinois law companies headquartered in the state must begin disclosing the racial, ethnic, and gender makeup of their boards starting next year.
What ISS is requesting mirrors the annual diversity reports major tech companies like Apple, Facebook, Microsoft, and others have been publishing since 2014. Those companies began publishing the reports voluntarily after legal and shareholder pressure began mounting around Silicon Valley’s lack of diversity. In similar fashion, ISS appears to be hoping that the civil movement, heightened attention around social impact investing, and increased regulatory requirements will compel boards to do the same. Not unlike in tech, Sutton says it is going to take the largest and most visible companies to start voluntarily disclosing board diversity data first if the practice is to become widespread. She says the more companies choose to voluntarily report data the more it will create a ripple effect on other boards. “Not reporting on diversity when your peers are could be taken by someone to mean that you aren’t as diverse or reflect poorly on the organization,” says Sutton.
For his part, Nels Olson, vice chairman and co-leader of Korn Ferry’s Board and CEO Services practice, says even if the news isn’t optimal disclosing it could prove beneficial. “Getting news out there can help mitigate issues,” says Olson. He says that having a plan in place and communicating it proactively could help mitigate criticism.
In fact, the COVID-19 pandemic and the Black Lives Matter movement together have sparked a need for boards to communicate and engage with a far broader range of stakeholders than ever before—as evidenced by the ISS disclosure request. That means directors need to reflect a larger group of stakeholders beyond just shareholders, Olson says. He advises as a best practice that boards emphasis that they are taking diversity seriously and insisting that the company is taking concrete steps to address the issue.
“A lot of boards miss the communication piece,” says Olson. “Being transparent signals to employees and clients that the board wants to be part of the change and is striving for improvement.”