Diligent S&G report
Diversity disclosures and beyond
Diversity disclosures
and beyond
How boards are being tied to social issues oversight
Governing
the S in ESG:
2021 trends from
the Diligent Institute
By Kira Ciccarelli,
lead research specialist, and Edna Frimpong, head of international research, Diligent Institute
Governing the S in ESG: 2021 trends from the Diligent Institute
By Kira Ciccarelli, lead research specialist, and Edna Frimpong, head of international research, Diligent Institute
Last year, corporate leaders faced intense pressure to take a closer look at the S in ESG. The reasons behind this pressure were largely twofold: the pandemic brought concerns about employee safety, health and wellbeing (both physical and mental) to the forefront, and social unrest in the US following the death of George Floyd caused companies and their leaders to re-evaluate their roles in fostering diversity, equity and inclusion (DE&I). In 2021, we also saw the persistence of a virtual work environment and a host of other factors result in the Great Resignation and talent crisis, ensuring that directors paid even more attention to human capital issues in the boardroom.
As investors, regulators, customers and employees alike made their concerns about these social issues heard, how have companies and their boards responded? How have those responses developed throughout 2021, and where are we headed in 2022 and beyond? This year, Diligent Institute set out to learn more about how the governance of the S in ESG is changing. Here’s what we learned.
How do directors feel about the S in ESG?
Diligent Institute’s Corporate Sentiment Tracker gives us unique insight into what topics are on the minds of corporate leaders by scraping more than 56,000 English-language news sources for trending terms being spoken about in the media by corporate leaders.
We also track ESG topics based on the World Economic Forum’s International Business Council ESG metrics, as outlined in its recent white paper, Measuring Stakeholder Capitalism. Over the course of the last year, ‘diversity and inclusion’ was the second-most frequently discussed ESG topic, behind ‘bio-risk’, which has been in the top spot since the beginning of the pandemic.
As 2020 drew to a close, we also wanted to learn more about how directors were feeling regarding recent diversity mandates. That month, Nasdaq filed a proposal with the SEC that would require listed companies to have at least one woman and one member of an under-represented group on their board – or explain why they do not.
We asked directors whether they supported diversity mandates in our December 2020 Director Confidence Index, a monthly flash poll of US public company directors conducted in partnership with Corporate Board Member (CBM).
The results were quite surprising: nearly half (46 percent) of those polled in December say they are in favor of diversity mandates. Comparatively, in 2019, CBM asked directors whether they approved of California Senate Bill 826, which required gender diversity in the boardroom for all public companies headquartered in the state. Of those surveyed, 66 percent opposed the measure and only 24 percent approved of it.
Women gain ground in the boardroom and in leadership roles
In March 2021, we published our annual report on gender diversity, titled Gender and Leadership in the Boardroom: Progress in a Tumultuous Year. In this report, we wanted to learn more about what happened to women once they joined the board. Did they join committees and become board leaders at the same rate men did?
The results were hopeful: female directors have made progress on board committees in 2021 compared with 2020, rising 3 percentage points from 24 percent to 27 percent, and women’s representation in board committee chair roles rose by the same margin, from 21 percent to 24 percent. Significantly, the percentage of female board members chairing the audit committee of their board has increased by 7 percentage points.
In the EU, the data suggests that the average percentage of women on board-level committees overall was 30 percent in 2021, up from 29 percent in 2020. The percentage of women on remuneration and nomination committees has decreased only slightly, from 29 percent in 2020 to 28 percent in 2021.
Female representation on audit committees, however, has increased by 3 percentage points, from 30 percent in 2020 to 33 percent in 2021. The percentage of women chairing the committee has also increased significantly from 27 percent to 32 percent over the same period.
In North America, women account for 24 percent of committee members. The average percentage of women chairing committees has also climbed from 18 percent in 2020 to 21 percent in 2021. The percentage of women on remuneration and nomination committees has increased from 21 percent to 25 percent from 2020 to 2021, which deviates positively from the European trend.
The average percentage of women holding chair positions on the remuneration and nomination committees has climbed, too, from 19 percent in 2020 to 23 percent in 2021. Female representation on audit committees has also increased by 3 percentage points, from 22 percent in 2020 to 25 percent in 2021.
Furthermore, the percentage of women holding audit chair positions has increased significantly from 17 percent to 20 percent over the same period.
Gender diversity, director age and overboarding
In September 2021, we followed up our March report with an update focusing on director age and overboarding by gender. One of the most interesting findings is that the average age of board members is rising, moving from 58.9 years in 2020 to 59.6 years in 2021, with the financial sector having the highest average director age at close to 63 years.
The report also reinforces our earlier findings that women directors are, on average, younger than their male counterparts: the average age of a female director is 59.33 years old and the average age of a male director is 62.91 years old.
Although we still have a long way to go to achieving gender parity on boards, we have discovered that notable indices such as the S&P 500 and the FTSE 350 currently have no all-male boards, an impressive accomplishment and a hopeful sign for the future.
Director skillsets: Reflecting a changing world
In January 2021, we published a report titled What Directors Think in conjunction with CBM. This annual survey of more than 400 directors asks respondents about the most pressing issues for the coming year. In 2021, for the first time in the survey’s 18-year run, skillset and background diversity outrank CEO experience as the most important attribute in board member selection. We decided to do some research to find out whether this sentiment was translating into action.
In June 2021, we published a report titled Beyond the C-Suite: Trends in Director Skillsets, to find out whether the skillset background of new board members was becoming more diverse. We looked at all director appointments dating back to the beginning of 2019 in the US, the UK and Australia to see whether newly appointed directors were beginning to come from less traditional backgrounds (as opposed to your typical former CEO, COO or CFO).
We discovered a small but definite momentum shift away from hiring directors with this more traditional background: director appointments from these backgrounds decreased from 59.4 percent to 56 percent. Meanwhile, appointments from more non-traditional director backgrounds such as human resources, ESG, marketing, legal and technology increased from 13 percent to 18.9 percent over the same time period.
Interestingly, appointed directors with these non-traditional backgrounds were twice as likely to be female as their traditional counterparts. In spaces such as ESG and HR, director appointees were overwhelmingly female, and even in the technology space, director appointees were more than 50 percent female. This is another hopeful sign: hiring for one aspect of diversity like skillset can also mean you add more gender diversity to your boardroom.
Looking forward: What’s to come in 2022?
As we enter the last few weeks of 2021, it’s clear progress has been made. Companies and their boards have increasingly focused on the S in ESG. Albeit slowly, boardrooms are becoming more diverse in terms of gender and skillset backgrounds. Directors are coming around to the idea of diversity mandates, and they’re speaking up about social issues, particularly DE&I, that are in the news.
In January 2022, we will publish our annual edition of What Directors Think in partnership with CBM, and our survey results will show some more positive developments when looking at the S in ESG. We asked respondents which issue areas would be the most prominent on their board agenda in 2022. Talent/workforce takes second place, beating every other issue area listed except for M&A. Last year, human capital came only 10th on our list, and DE&I came eighth.
It’s also clear, however, that there is a lot of room for improvement and growth. In the same survey, respondents also list talent and culture as the second-most and third-most difficult issues to oversee, lagging behind only cyber-security.
In the comments section, many directors express frustration with the focus on ESG, and insist they should ‘focus on strategy instead’. When we asked about the most important criteria for the selection of their next board member, C-suite experience was back in first place.
The survey results around DE&I initiatives also paint a mixed picture. While 45 percent of respondents say they had already met their diversity goals, no respondents indicate that their timeframe to meet their diversity goals span more than five years, indicating that the push for DE&I is not being thought of in the long term.
Meanwhile, 32 percent say they’re on track to meet their diversity goals despite only 23 percent saying they have a timeframe in place, which begs the question: how do you know if you’re on track to meet your goals if you have no timeline?
In 2022, it’s important that business leaders continue their focus on the S in ESG. These initiatives should be considered as integral to company strategy and a valuable opportunity for long-term value creation. As pressures around attracting and maintaining talent, DE&I, culture and a host of other social issues continue to mount, boards need the right tools, processes and information to lead effectively.
A new approach
to an old problem
Tejal Patel, corporate governance director with the SOC Investment Group, explains how the group came to file groundbreaking racial equity audit proposals this year and how governance plays a role in tackling issues of diversity and inclusion
A new approach to an old problem
Tejal Patel, corporate governance director with the SOC Investment Group, explains how the group came to file groundbreaking racial equity audit proposals this year and how governance plays a role in tackling issues of diversity and inclusion
We felt we had to do something more than just ask for additional directors on the board or better disclosure
SOC (then CtW Investment Group, working alongside the Service Employees International Union) filed several novel racial equity audit proposals this past proxy season. Why did you look to financial services firms and why was the idea of conducting an audit important?
After the events of June 2020 we were trying to figure out how we could move the issue of racial justice and inequality in the shareholder space. A lot of companies had come out with statements supporting Black Lives Matter, talking about how they were very interested in addressing racial inequality, and quite a large sum of money was attached to that.
We started looking at some of these companies and one thing that stood out was the financial industry. At the end of the day, banks are the gatekeepers of generational wealth creation. They allow you to buy a house by getting a mortgage, for example, open a checking account, open a savings account, build credit in a lot of ways. Things like that are important for day-to-day life, obviously, but they also help build generational wealth, which is one of the reasons I think systemic inequality has lasted for such a long time.
We’ve been trying as investors to bring up issues of inequality for quite some time. It often wasn’t received in the same way that it was in the past year, so we would file proposals more toward board diversity, for example, or [Equal Employment Opportunity 1] disclosures and things like that.
After we saw the racial justice protests and the disparate impact that Covid-19 has had on communities of color, we felt we had to do something more than just ask for additional directors on the board or better disclosure.
The proposals didn’t receive majority votes but did secure ‘significant’ levels of support. What did you make of the response from investors?
We were very pleased with the vote results. On average, new proposals usually get [support] somewhere in the single digits. It takes quite some time to acclimate the investor space with the idea of doing something new, especially when that involves asking an outside third party to look into your financial products, for example.
We were really pleased to see there was widespread support and also an increase in support levels. At the first meeting, [the proposal] got 26.5 percent. By the last meeting I think it got well into the 40s. I think this was indicative of a paradigm shift that’s going on. Social issues, particularly issues of inequality and discrimination, were something we tried to raise in our engagement but they were often seen as outside the purview of our discussions or we didn’t have the hard data in the same way as [there is for] some of the environmental issues.
We were really pleased to see there was widespread support and also an increase in support levels
What we’ve seen in the last year is a shift in mindset and we’re also seeing a growing body of work and statistical evidence on the racial wealth gap and the disproportionate effect Covid-19 has had on communities of color, for example. That has drawn investors into supporting what was a very new idea and took a lot of legwork and outreach to explain.
Did the responses of companies change as your engagement progressed?
We had different levels of engagement. In some instances, we had numerous conversations and I think they were fruitful [but] we just couldn’t see eye to eye. The Investment Group was very firm about making sure it was a third-party, independent audit and that there was a public report, and we couldn’t get on the same page. At least some of the [companies] have seen these results and are, I hope, conducting engagement with other investors.
What do you view as the link between corporate governance and social issues such as racial inequality? What is the role of the board in terms of tackling diversity, equity and inclusion (DE&I) issues?
There are two components. A lot of companies signed up to the Business Roundtable’s stakeholder-focus statement, and when you commit to addressing all stakeholders and their needs, you have to be prepared to do that, particularly in a time period when there is this heightened focus.
Your role as a director is to make sure you are adhering to these commitments… and also adhering to commitments you made [on] various issues that have arisen, be that racial inequality, sexual harassment, employee concerns about workplace safety, that sort of thing.
The other component of this – at least from the audit perspective and I think it applies to other DE&I proposals – is that [ultimately] these are risk mitigation mechanisms. The hope is that the board is able to identify what might be a potential reputational risk and address it so that hopefully it won’t blow back later. We have seen that when you don’t provide the requisite amount of oversight of what might be considered to be a purely social issue, it can cause real problems.
The hope is that the board is able to identify what might be a potential reputational risk and address it so that hopefully it won’t blow back later
Do governance issues – such as board structure – feature in your engagement around DE&I issues?
Yes. In our engagements we’re asking about how the board is overseeing, for example, the racial equity commitments it has made in response to the George Floyd protests. We’re also asking boards which committees are assigned to [that], what the structure is in terms of the chief diversity and inclusion officer vis-à-vis the CEO and the board and who they are reporting to, that kind of thing. We may further ask compensation-related issues, [such as] are there any metrics looking at this sort of thing? How do those metrics trickle down? Are they only for named executive officers?
Governance issues feature heavily. This is mainly what it’s about as an investor issue. We want to make sure the board is providing the requisite amount of oversight of issues that could cause serious reputational harm to the company.
Will you be filing racial equity audit proposals for next proxy season?
Yes. We are very likely to refile at the banks. We’re considering filing at a couple of other companies. From what I have seen, we can also anticipate this proposal being filed at other companies by other shareholders. Companies outside of financial services should probably start paying attention to it.
‘We are poised to
start seeing a <I>significant</I> uptick
in voting against directors’
Eli Kasargod-Staub, executive director and co-founder of Majority Action, tells <I>Ben Maiden</I> that more directors are going to face votes over board actions in response to social issues and related shareholder proposals
‘We are poised to start seeing a significant uptick in voting against directors’
Eli Kasargod-Staub, executive director and co-founder of Majority Action, tells Ben Maiden that more directors are going to face votes over board actions in response to social issues and related shareholder proposals
How significant is the emergence of racial equity audit shareholder proposals this year?
I think the racial equity audit proposals we are seeing are as significant a development in corporate governance as anything we have witnessed in the last decade or longer. [They] are part of a wave of shareholder action… that is evolving beyond calls for companies to disclose how they view the risks to themselves of various ESG-related topics. [They are] moving in the direction of calling on corporate boards to assume the comprehensive responsibility they have always held for addressing risks both to their company and to broader long-term diversified portfolios.
Racial equity audits are a tremendously important tool because they call on corporate directors to take responsibility for the oversight of how their company’s behavior either ameliorates or exacerbates systemic racism. In doing so, they can help companies better address those risks to themselves and can be a critical tool for helping investors address the systemic-level risks of systemic racism to long-term investor portfolios.
[There is a] broad GDP drag driven by systemic racist inequities in wages, housing and health – $16 tn in forgone GDP over the last 20 years.
I think the racial equity audit proposals we are seeing are as significant a development in corporate governance as anything we have witnessed in the last decade or longer
Do you think developments this year, such as at ExxonMobil, signal a greater focus on directors as a feature of investor action on ESG issues?
Oh yes. There can and will be dissident slate challenges, whether next year or in future years. And I think we are poised to start seeing a significant uptick in voting against directors. The vast majority of S&P 500 companies have majority voting, which means you do not need a dissident slate to bring consequences for directors who are failing in their stewardship responsibilities as long-term investors collectively define them.
I think we’re going to start seeing – on both environmental and social issues – a significant level of action. That is both because they communicate a far more powerful signal and because they have an altogether different level of consequence.
Majority Action and state treasurers have an initiative, Proxy Voting for a 1.5°C World, which aims to hold board directors accountable for their failures to address climate change. Is it possible to have similar efforts in terms of social policies?
Absolutely. I think this is going to evolve over the next few years. For example, let’s say a company loses a majority vote [requesting that it] conduct a racial equity audit. These proposals call on companies to conduct independent, third-party audits that engage with companies’ stakeholders to get the full analysis of the impact of a company’s business practices.
And then imagine that evidence of harm from a company’s behavior emerges over the course of the audit process and the company chooses not to engage with those stakeholders, does not try to address those issues, does not provide a channel for them to engage with someone on the board. You could easily start to see those kinds of actions turn into votes against directors who are failing to meet shareholder expectations about engaging on these issues.
On some social issues it may be that that voting on directors has more to do with responsibility around process than responsibility about outcome, unless and until benchmarks around company behavior become widely adopted by shareholders.
How would decisions be made about which director on the board should be held responsible in such instances?
There is the circumstance in which there is a majority vote on a proposal and the company fails to implement that to its shareholders’ satisfaction, which could very well be happening in the social space and very well be an area of voting next year. Those kinds of votes would often be directed at the chair or lead independent director, because that’s who is responsible.
In board diversity matters, often the nominations and governance committee is the right venue. Many [boards] have a committee with express oversight of the firm’s political spending and in that case the chair and/or other members of that committee would likely be the subject of a ‘vote no’ effort.
When it comes to racial equity audits, it might depend on the particular circumstances of the company. These audits are calling for whole-of-company responses, similar to transformational change on climate. In some or many cases I can easily see that leading to votes on the board chair and lead independent director.
What do you view as the links between corporate governance and social issues generally, and what do you view as the role of the board?
It’s an essential question. The role of corporate governance and why it’s so fundamental here is two-fold. First, corporate directors have a fundamental duty to be stewards of the companies they govern and to understand that no company is an island. This is true when it comes to climate change, biodiversity or dealing with the fundamental nature of some of these social issues.
I think we’re going to start seeing – on both environmental and social issues – a significant level of action
Second, if you’re a member of a board of directors and you don’t happen to believe that yourself, that’s fine – your shareholders are increasingly going to believe it for you.
For a long time, we have imagined a perfect alignment between corporate director interests and long-term shareholder interests. But long-term investors are increasingly waking up to the systemic nature of the crises facing their portfolios and the reality that companies are either ameliorating or exacerbating those risks, but not detaching from them.
Investors are increasingly saying, Wait a minute: we don’t care if you think it’s a good idea to undertake behavior that is driving systemically racist outcomes or exacerbating climate change. We know that’s bad for us. Directors are either going to embrace that view or have it embraced for them by those with voting power over director elections.
SSGA sees social
issues governance
come to the fore
Ben Colton, global co-head of asset stewardship at State Street Global Advisors (SSGA), discusses the importance of the board’s role in overseeing topics such as diversity
SSGA sees social issues governance come to the fore
Ben Colton, global co-head of asset stewardship at State Street Global Advisors (SSGA), discusses the importance of the board’s role in overseeing topics such as diversity
SSGA’s proxy voting practices for 2021 included that the firm would vote against the nominating and governance committee at S&P 500 companies that do not disclose, at minimum, the gender, racial and ethnic composition of their boards. What was the response to that during engagement and did it evolve?
We started to bring racial and ethnic disclosure to the forefront in August 2020, outlining the expectations for disclosure around strategy, board representation, board oversight, metrics, targets and goals. We had many in-depth discussions with boards and management teams about our expectations and the challenges they were facing.
The response to our engagement has been very, very positive for the most part. We saw a huge jump in the number of companies that were disclosing not only their [Equal Employment Opportunity 1] (EEO1) data but also self-identified [information] on the race and ethnicity of board members. We were pleased with the level of disclosure many companies were putting in their proxy statements and in their sustainability reports during the fall. We were open to waiving our policy in those cases where we had firm commitments [to provide the disclosure we were seeking].
We also announced that we would vote against the chair of the compensation committee in 2022 if there was no baseline EEO1 disclosure. There are challenges with EEO1 data, we recognize that, but it is something that is easily collected and must be reported to regulators. We are also encouraging companies to build off that, to tell us why there’s more to the story. If there’s a better way to look at diversity in the organization, tell us how we should be looking at it and what the strategy is.
If there’s a better way to look at diversity in the organization, tell us how we should be looking at it and what the strategy is
Do you have a preference as to whether that disclosure goes in the proxy statement or an ESG report?
We’re agnostic as to where it’s disclosed as long as it’s in the public domain.
Did you find that board members were involved in these issues?
The conversation at the board level around disclosure and around oversight of diversity was much more robust this year. We did a study with Russell Reynolds and the Ford Foundation with about 30 directors at US and global companies and dug deep into understanding the risks boards should be discussing and what good disclosures look like, not only within their organization but across other stakeholder groups. Thinking about the communities in which they operate and which they represent. Thinking about other stakeholders, including their employees and shareholders.
We think the governance of social issues has really come to the forefront this year. I think that’s a very positive sign because ultimately the board should be accountable for overseeing financially material risks, and we believe diversity and inclusion is a financially material risk that we want to see more disclosure on.
Were board members involved in discussions with you as an investor?
Yes, absolutely. A majority of the discussions around these issues were at the board level. We want to have quality, robust discussions with board members and we expect them to be able to constructively engage in dialogue around this with investors.
[In terms of EEO1 data,] nobody’s where they want to be. The numbers are not where any company wants to be, including us. The overall conversation is not that we are expecting companies to be exactly where they want to be right now. Rather, we want to see the disclosure and know that what gets reported gets managed and improved upon.
Having that roadmap and being held accountable for targets and goals is, I think, very important.
What are the advantages of your voting policy targeting committee chairs?
We also think shareholder proposals are a good route to raise awareness with companies and boards. We will support shareholder proposals that are aligned with our expectations.
We strongly believe that oversight of diversity is a financially material risk and opportunity that companies need to be thinking about
Could you elaborate on what you see as the board’s role when it comes to social issues such as diversity?
It’s the management team’s duty to execute strategy, but it’s the board’s job to oversee the execution of strategy, to oversee how risks are being mitigated or opportunities are being capitalized on. We use the board as our representation within the company to oversee financially material risks and opportunities, and we strongly believe that oversight of diversity is a financially material risk and opportunity that companies need to be thinking about.
We heard in our discussions in the research we published that a lot of directors say it’s about doing the right thing. But for us it’s about value and overseeing these risks. We’ve seen the headline risks manifest themselves, we’ve seen the power of harnessing diversity in thought, so increasingly we’re seeing these issues as being financially material and something the board needs to be thinking about.
Do board processes and structures feature in your engagement discussions?
Yes. Structure is important. We’re not prescriptive on where [these issues] should sit. Certainly, it should be a board-level discussion, just like any other strategic discussion. But we have also seen a lot of companies making explicit references to oversight of these issues in their charters and bylaws or within committees themselves. We think having that formal framework, making a more explicit reference to these issues and oversight of them, is a very positive thing.
How can investors assess the effectiveness of board governance when it comes to social topics?
That’s definitely the next step. First, we need the disclosure to understand what the picture looks like and then you can start thinking about performance. We also want to get examples of situations where maybe the board needs to think more deeply. For example, when we talk about corporate culture and we talk about employee engagement and surveys, we ask boards whether they can provide an example of where a hot spot was identified and what actions were taken to mitigate against any kind of risks that were brought up.
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Diligent Institute seeks to help corporate leaders be more effective by providing cutting-edge insights on corporate governance, amplifying the voices of diverse corporate leaders and sharing broadly all we are learning about modern governance practices.
Founded in 2018, Diligent Institute serves as the global corporate governance research arm and think tank of Diligent Corporation, the largest SaaS software company in the governance, risk and compliance space. Diligent serves more than 20,000 organizations and more than 700,000 corporate leaders in more than 90 countries. Diligent Institute is able to tap into that broad network and highlight the diverse perspectives of corporate leaders from around the world.
Diligent Institute produces original research both on our own and in collaboration with partners, including institutions of higher education and thought leaders in the corporate governance space. We produce more than a dozen reports each year, ranging from our monthly Director Confidence Index, which measures how corporate directors are feeling about the economy, to in-depth reviews of issues such as ESG practices and our AI-powered Corporate Sentiment Tracker, which analyzes data from thousands of public sources to discern what’s on the minds of corporate leaders.
