Investors grapple with changing demands: Boardroom diversity & composition

November 22, 2022

Edna Twumwaa Frimpong

This post is the fifth in a series of guest-authored commentary pieces spotlighting data and insights from the Board Diversity Gaps report, produced in partnership between Diligent Institute and 22 partner organizations.  

Corporate governance places great importance on the role of boards of directors in managing public companies but recent years have seen a growing awareness on the part of institutional investors that diversity is too important a topic not to be addressed in their engagements with those same companies.

After the 2008 global financial crisis, investors quickly accepted that if boards of directors were to play an important role in the corporation, the directors themselves should be independent of management. More recently, that viewpoint has evolved to include diversity as an important characteristic of boards, thus ensuring that a range of viewpoints are considered. As a result, investors have come to adopt more stringent voting policies to ensure that board composition reflects the diversity of society. This has been reinforced more recently by legislation and regulation, especially in the U.S.

Investors have also historically taken an interest in the composition of listed companies’ workforces. However, the COVID-19 pandemic and resurgence of Black Lives Matter in 2020 has accelerated engagement on this topic, leading to an increase in support for resolutions advanced by nonprofit shareholders and new resolution types that go beyond disclosure and force companies to consider whether they contribute toward an equitable society.

Data as of September 30, 2022, from Insightia, a Diligent brand, highlights the changing role of diversity in shareholder engagement, governance, and stewardship.

Company disclosure and the state of diversity today

Insightia’s Governance module tracks the gender and racial or ethnic diversity of boards where the data are available. That is much more commonly the case for gender diversity than racial or ethnic diversity, which are considered more sensitive data points, and besides director gender, disclosure is generally more advanced in the U.S. than in other markets.

However, recent quasi-regulatory developments, including legislation affecting companies based in California and the adoption of a non-gender diversity requirement for a public listing on the Nasdaq stock exchange (Nasdaq-listed companies must publish a board diversity matrix and “have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+,” or explain why they have not complied) have raised the issue of disclosure to new heights.

So far, despite the rapid escalation of the issue, ethnic diversity disclosure has not become widespread, with 25% of the S&P 500 and 12% of the Russell 3000 indexes disclosing the ethnic breakdown of their boards. Based on those companies that do disclose the ethnic breakdown of their boards, boards of companies in the S&P 500 index are 75% white and those in the Russell 3000 index are 79% white.

The true figures may show a lower proportion of non-white directors since those companies that have disclosed are expected to be larger, more progressive, and more likely to have non-white board members.

The pandemic had a negative impact on gender diversity on boards, at least in the Russell 3000. Although more female directors were appointed in 2020 than in 2019, the proportion of female directors fell as many more men were added to boards. The proportion of new female appointments increased in 2021 but is yet to exceed 50%.

The proportion of new Russell 3000 director appointments by gender
2019202020212022 YTD
Source: Insightia | Governance

Investor stewardship and diversity

Voting policies 

Although investors have been a key part of the increasing pressure on issuers to adopt diversity policies for their boards and workforces, only 21% of the asset managers tracked by Insightia’s Voting platform have a publicly stated diversity policy. Although the proportion sounds small, that represents $78.5 trillion of assets under management – over half of global institutional assets under management.

So far, the focus is primarily on gender or a broad definition of diversity that allows for interpretation. Fewer than 20 investors, representing just 1% of the total number of asset managers on the database, demand a certain threshold of ethnic, racial, or another non-gender diversity such as sexual orientation, from companies they invest in.

These investor policies, which set out the scenarios in which the investor will vote against resolutions at shareholder meetings such as director reelections, are only one measure of how widespread the support for diverse boards is.

The relatively small proportion may be explained by the fact that many smaller investors that struggle to afford extensive proxy voting teams rely on proxy voting advisers such as Institutional Shareholder Services (ISS) and Glass Lewis for recommendations on how to vote on proposals such as director reelections.

In the 2022 proxy season, ISS’ policy for shareholder meetings at U.S. companies is to generally recommend against the chair of a nominating committee and occasionally against other directors when a board is lacking any female or ethnically diverse representation. Glass Lewis expects boards of more than six members to be at least 30% female but only has a policy on ethnic diversity for California-based companies because of the state’s unique legal requirements. As a result, many investors have stealth diversity policies, even when it is not made explicit in their own voting policies.

Shareholder proposals

The other way in which investors encourage corporate diversity is through supporting resolutions from shareholder advocates. More than three-quarters of shareholder proposals on diversity topics are filed at U.S. companies in any given year, where they are usually nonbinding – meaning that management is not obligated to respond.

Data from Insightia’s Voting module show that the number of proposals on diversity has grown sharply in recent years.

In 2018, there were 16 proposals on various diversity topics, including requests for issuers to publish internal workforce composition data, the adoption of diversity policies, and details about the diversity of the board of directors. That had risen to 26  in 2020. Average support for these proposals fluctuated around a level that showed significant support but only occasionally resulted in the proposals gaining majority support.

However, the resurgence of the Black Lives Matter movement in June 2020 – toward the end of the proxy season – has clearly changed the dynamic for shareholder proposals on diversity.

The first notable change in 2021 was an increase in support for existing proposal types. Average support for board diversity report proposals leaped from 36% in 2020 to 62% in 2021. Proposals regarding workforce diversity, including disclosure of employee identification data, averaged 50% in 2021.

Another big change in the 2021 proxy season was the introduction of a new type of proposal, the racial equity audit, which calls on the target company to consider all of the ways in which its operations and policies impact inequitable outcomes for employees, customers, and other stakeholders. There were nine racial equity proposals in 2021 and 23 so far in 2022 with growing average support (as well as 11 counterproposals from conservative groups that deem anti-racist programs to be discriminatory), dramatically increasing the overall number of proposals on diversity topics to over 60 for the first time.

Racial equity proposals have so far been well-supported, receiving on average one-third support (eight, including at Apple and Johnson & Johnson have won majority support). Furthermore, several companies – including BlackRock and Amazon – have agreed to conduct the audits in return for the proponent withdrawing its resolution.

While the continued high number of shareholder proposals in 2022 confirms that diversity is still a key priority for proponents, support from the wider investor community has dropped below recent averages. This may be because companies have made advances over recent years or because shareholder proposals have become increasingly prescriptive, and investors are generally loathe to support anything that management considers to interfere with its ability to manage a business.

Support for diversity resolutions (global) 
 2018 2019 2020 2021 2022 YTD 
 No. % support No. % support No. % support No. % support No. % support 
Create a board diversity report 24.3 35.7 61.9 15.1 
Adopt/amend board diversity policy 25.3 33.4 10 14 6.4 9.8 
Approve/amend diversity/EEO policy  38.8 35.6 13 36.5 15 50 35 
Non-discrimination audits       33 33 33.3 
Total number of diversity proposals 16  22  26  37  54  
Source: Insightia/voting

Coda: activist investors – part of the problem?

Activist investors often present their board nominees as offering diverse opinions or skill sets. Sometimes they argue that shareholders need direct representation on the board, other times that board members with no existing links to management and skills or experience not currently represented on the board will help to enhance shareholder value. 

However, activist investors have been criticized for overwhelmingly nominating non-diverse candidates, with companies leveling the charge against dissidents since at least 2018, according to Insightia’s Activism module. 

Despite activists becoming more conscious of the criticism in recent years, the proportion of activist nominees that are female topped out at 23% in 2021. Some but not all activists have become more proactive about sourcing diverse candidates for their slates. However, considering that activist-appointed directors account for around 10% of the new board members identified each year, they are unlikely to become part of the solution. 

The proportion of activist director appointments at US-listed companies by gender 
 2018 2019 2020 2021 2022 YTD 
Female 10.59% 17.01% 17.79% 22.76% 18.75% 
Male 89.41% 82.99% 82.21% 77.24% 81.25% 
Source: Insightia | Activism & Voting 

About the author

Head of International Research

Edna Frimpong is an experienced research analyst with a demonstrated history of working in the information technology and services industry. In her role with the Diligent Institute, Edna oversees and directs corporate governance research projects and partnerships internationally, outside the US.

She joined Diligent Institute in 2021 after six years with CGLytics — a corporate governance analytics firm based in Amsterdam, The Netherlands, acquired by Diligent — where she served as Head of Research for the EMEA region. Previously, Edna held research positions at firms including Sustainanalytics and Carnomise. She received her Master’s Degree in Finance and Law from the Duisenberg School of Finance in Amsterdam, and her Bachelor’s Degree in Administration, Insurance and Risk Management from the University of Ghana.

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