One of the most influential shareholder advisers has called on American companies to disclose the ethnic backgrounds of their directors and officers, as pressure is mounting to diversify the upper echelons of American companies.
Institutional Shareholder Services, a proxy consulting firm with a reputation for influencing the corporate governance agenda in the United States, has written to companies asking them to disclose this information on a voluntary, aggregated and self-contained basis. identified.
Many institutional investors use the data compiled by ISS and its main rival, Glass Lewis, to inform their votes so that the additional disclosure may lead to votes against boards of directors that the shareholders consider insufficiently diversified.
Businesses have faced a scrutiny of diversity at all levels since the murder of George Floyd sparked protests against racial inequality. According to ISS data, black directors accounted for only 4.1% of all board seats in the larger Russell 3000 index last year, while 13.4% of the American population is black.
The emergence of environmental, social and governance-focused investment strategies, known as ESG, has increased the pressure to add more women and non-white directors to boards of directors.
Vanguard is among the institutions that have called for greater disclosure of diversity, saying to the companies in which it invests: “The business case is compelling … Various boards make better decisions, and better decisions lead to better long-term results. ”
In the past, the ISS has sought to compile its own data on the ethnicity of directors, but the new approach suggests that it wants more complete disclosure.
A letter seen by the FT from Marija Kramer, head of the ESG for ISS, tells companies “that we are looking for information on the self-identified race / ethnicity of each of the company’s directors and designated executives (NEO ), to the extent that the company and the directors or executive officers concerned are prepared to provide it. ”
Subodh Mishra, Director General of the ISS, confirmed the scope, saying it was “consistent with our long-standing goal of ensuring the accuracy of the data underlying our research, ratings and other solutions”.
It will allow each director to choose to disclose up to three ethnicities, from a list of eight in use by the US government since 1977, to describe their ethnicity as “other” or to refuse to answer.
Pamela Newkirk, whose book Diversity Inc examines the history of diversity initiatives in the workplace, welcomed the ISS decision.
“Transparency should help. This is not always the case, as the annual technical reports show. But if the institutions are serious about increasing diversity, transparent measures are a good place to start, ”she said.
Steve Klemash and Jamie Smith of the EY Center for Board Matters found last year that 45% of Fortune 100 companies had explicitly disclosed racial or ethnic diversity statistics to their boards, compared to 23% three years earlier.
Last year, the Securities & Exchange Commission told US companies that it should disclose whether self-reported diversity characteristics play a role in the selection of directors, although some critics have argued that such disclosure was insufficient and regulators should demand quotas.
In its letter, the ISS stated that it seeks “to ensure that all stakeholders have accurate and complete information as they contemplate the wider debate regarding the state of business diversity beyond the kind”.
He added that he planned to “dialogue with a wide range of stakeholders on the potential need to extend the use of data from self-identified race and ethnicity managers” in his ESG rating methodologies, policies and other offers.
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