Last month, State Street Global Advisors followed up on its ESG (environmental, social and governance) initiative and disclosed that it has sent letters to boards of public companies in its investment portfolio regarding its expectations for board and workforce diversity in coming years. This comes on the heels of State Street’s announcement earlier this year that it will “take appropriate voting action” against board members at large US, UK, Australian, Japanese, German and French companies that do not score well on State Street’s “responsibility factor,” a metric it introduced in 2019 that measures how well companies do on various ESG issues. This represents another step in the evolution of increased expectations by shareholders and others regarding board and executive officer diversity.
Besides the State Street board letter, several other factors currently add to what is emerging as a practical requirement that public companies consider and, over time, act to increase board and workforce diversity. For example:
- As noted in our client alert from earlier this year, Illinois-headquartered public companies must now disclose information about female and minority directors and officer in their Illinois Annual Report filed with the Secretary of State. Though Illinois is not mandating any specific composition of boards or executive officers, it is publishing the results;
- In 2018, California passed a law requiring that publicly- held companies either domiciled in California or with their principal executive offices in California meet specified quotas;
- Last month, the California legislature passed a bill requiring those companies to have at least one minority director by the end of 2021 (the Governor has not yet signed the bill);
- The SEC recently adopted amendments to Item 101 of Regulation S-K to require a description of a company’s human capital resources, including any human capital measures or objectives that the company focuses on in the management of its business;
- Institutional Shareholder Services now offers ESG ratings on companies in response to investor demand for information on ESG matters; and
- Goldman Sachs CEO David Solomon announced in January 2020 that starting mid 2020, Goldman will take companies public only if there is “at least one diverse board candidate, with a focus on women . . . . And we’re going to move towards 2021 requesting two.” He also noted that the performance of public companies with at least one female board member is “significantly better than those without.”
Be Proactive, not Responsive – Some Practical Guidance
All of this reinforces the continuing trend towards both shareholder and governmental action mandating diversity on the board and in the executive ranks. But of course all companies are not created equal, and different companies have different approaches, different opinions and, in many cases, different needs. With that in mind, we offer the following suggestions:
- Think NOW about what next year’s proxy statement is going to say about diversity. If you are a California- or Illinois-headquartered company, keep in mind that the proxy statement disclosure on diversity will be compared to published data from your state annual reports. Further, as State Street and other institutional investors become more active and insistent regarding diversity, you may be called out to answer, explain and support the information about diversity contained in your proxy statement.
- Carefully create and articulate your diversity objectives. Be careful to set goals and objectives that are realistic and achievable for your company. Nothing will look worse than adopting a diversity policy that is not followed. Consider your needs, your ability to attract and retain diverse talent and any requests/demands that you have received not only from investors but also other stakeholders.
- Consider amending your Nominating Committee and Corporate Governance Charter to accurately reflect your diversity policy. This charter should contain your diversity policy for board membership. It is now September. Consider adding amendments to this charter before the end of the year so that any statements of disclosures you make in next year’s proxy statement are in fact consistent with the charter. Most boards meet quarterly, and there is effectively one quarter left in the year. Consider getting this on the agenda.
- Continually review your diversity and inclusion policies. You should make continuous reviews of your board responsibilities for diversity and inclusion. In particular, how you identify and select potential board members and officers and the quality of the information you are using to make these decisions should be regularly reviewed.
These are issues that will continue to receive additional attention. A proactive approach to your company’s policies will serve you in good stead and minimize any disruptions in corporate governance and dissatisfaction with investors.
If you have any questions, please contact your CFMB lawyer or:
About Croke Fairchild Morgan & Beres
Croke Fairchild Morgan & Beres is a corporate law firm providing services to businesses, private equity and venture firms and their portfolio companies, public companies, founders and family offices. Formed by partners who worked at preeminent international law firms, the firm boasts a deep bench of sophisticated and experienced corporate lawyers. With offices in Chicago, Lake Forest, and Milwaukee, our team provides exceptional legal service while affording our clients the benefits of working with a small, agile, and driven law firm. For more information, please visit us online at crokefairchild.com.