Board Diversity Slows Down New Appointments

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U.S. boards are appointing fewer directors this year, potentially creating flash points as investor expectations for better representation of diversity and varied skillsets are heightened.

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Q3 2020 hedge fund letters, conferences and more

New Appointments To Boards Slowdown Due To Diversity

S&P 500 boards appointed 16 fewer directors in the year to November 24, compared with the same period in 2019, according to Activist Insight Governance data, while Russell 3000 boards appointed 373 fewer directors. Activists aren’t contributing much – in the S&P 500 there has been no net gain of activist-nominated directors (with 12 appointed and 12 resignation) and fewer than 100 activist directors appointed at Russell 3000 companies.

Governance and search experts told me in recent weeks that there might be several reasons for the slowdown in recruitment, including a brief pause during the earlier stages of the coronavirus pandemic. But demand has picked up in the second half of the year, many advisers say.

"The slowdown in recruitment was not necessarily to do with the crisis," said Steven Seiden, president of Seiden Krieger Associates. "Boards are hard at work to find diverse candidates."

"We have seen an increase in searches during the latter half of 2020," confirmed Martha Carta, head of Teneo’s governance advisory arm. "We have been working with boards that want to fill seats and are carefully considering the ramifications of the COVID crisis and the racial justice movement to ensure that their boards reflect the right skills and an appropriate level of diversity."

Finding Ethnically Diverse Candidates For Board Seats

Not surprisingly, the focus in corporate America is now on finding ethnically diverse, and in many cases, Black candidates for board seats. That is a response to the Black Lives Matter movement, which led a number of U.S. companies to commit themselves to promoting diversity, and investor demand. BlackRock noted in its annual stewardship report in September that it had voted against 1,500 management proposals on account of diversity concerns, and said it was "increasingly looking to companies to consider the ethnic diversity of their boards as we are convinced tone from the top matters."

Proxy voting advisers Institutional Shareholder Services (ISS) and Glass Lewis also explicitly referenced ethnic diversity on boards in their new voting policies for 2021, although ISS said it will focus on disclosure in 2021 and only start recommending against nomination committee chairs in 2022 on ethnic diversity grounds (unlike gender diversity expectations, which are well-established and continue to be raised).

According to Seiden, talented directors from ethnically diverse backgrounds are out there, although overboarding policies, which can restrict current executives to one additional board seat and other candidates to no more than four board positions, as well as a lack of diversity in C-suites generally, can force companies to look beyond current or former CEOs.

The Growing Size Of Boards

But another concern may be the growing size of boards. In 2019, S&P 500 companies and Russell 3000 companies on aggregate added 10% and 36% as many directors as resigned, respectively. In 2020, director appointments continue to outstrip resignations, albeit at a slower pace (by 6% and 18%, respectively). That suggests boards could be reaching a natural size limit.

But however the dam breaks, boards will likely move on refreshment as off-season engagement picks up and new policy deadlines near.

"Companies are well aware that investors, proxy advisors, regulators, and other stakeholders want to see progress on board diversity," says Carter. "Ethnic and gender diversity."

Speaking of diversity, this week Nasdaq petitioned the U.S. Securities and Exchange Commission (SEC) for permission to use board diversity as a listing requirement. The rule would require most Nasdaq-listed U.S.-based companies to have at least one female director and one ethnically diverse or LGBTQ+ director on a comply or explain basis. Disclosure would be required within one year and companies would be expected to meet the requirements in between two and five years, depending on their exchange. Some smaller or foreign companies could have two female directors.

After years of competition between the two largest U.S. exchanges to attract Silicon Valley’s increasingly undemocratic companies, a shift toward promoting better governance is a welcome development. The speed at which diversity has come to be viewed on par with fundamental director requisites, like independence, is also striking.

Quote Of The Week

Quote of the week comes from Natasha Lamb, Arjuna Capital managing partner, on the withdrawal of a shareholder proposal at Adobe, following the company’s decision to announce media race and gender pay gap disclosures. In a press release, Lamb said:

"The push for median race and gender pay equity is going to be a major issue in the 2021 shareholder season. We need more companies to follow Adobe’s lead, prioritize diversity in a meaningful way, and step forward with an honest accounting of pay equity."