Board diversity is one of the most visible corporate governance topics today. As pressure to diversify boards continues to grow, we anticipate that key constituencies of all types of entities, including nonprofits, may call for more diverse board composition. . Below, we discuss (1) recent diversity initiatives, influences and requirements that public companies and their boards must manage, (2) how these initiatives, influences and requirements in the public companies could impact the nonprofit space, and (3) key takeaways and possible next steps for boards looking to focus on diversity.
Diversity is a term that means different things to different people and entities. Generally, when this article uses the term, it is referring to gender and other factors such as racial and ethnic origin and sexual orientation. Where a specific initiative or other influence uses a specific definition of diversity, this article will include that definition below.
RECENT DIVERSITY INITIATIVES, INFLUENCES AND REQUIREMENTS
In recent years, diversity initiatives, influences, and requirements have grown at the U.S. Securities and Exchange Commission, Nasdaq, and various state legislatures. Similarly, various institutional investors have also adopted diversity voting guidelines.
For example, in August 2021, the United States Securities and Exchange Commission approved the Nasdaq Board of Directors’ Diversity Rules. Nasdaq rules define diversity as an individual who identifies in one or more of the following categories: female, underrepresented minority, or LGBTQ+, and the rules generally require Nasdaq-listed companies to have or explain why they don’t not at least two -identified various administrators. Nasdaq rules also require companies to annually disclose statistical information about board diversity using a standardized matrix.
Some states, such as Maryland and Illinois, have passed laws requiring the disclosure of information about the diversity of board members. Maryland law requires business entities – foreign or domestic, for-profit or not-for-profit – headquartered in Maryland and with operating budgets or total sales exceeding $5 million, to disclose in their reports annual data on the participation of women on the board of directors. The law does not apply to a private company in which at least 75% of the shareholders are family members. Illinois law requires certain publicly traded companies headquartered in Illinois to disclose data on the participation of women and minorities on the board of directors in their annual reports. For purposes of Illinois law, a minority person means a person who is a citizen or lawful permanent resident of the United States and who belongs to one of the following races or ethnicities: Native American or Native American Alaskan, Asian, Black or African American, Hispanic or Latino, or Native Hawaiian or other Pacific Islander. Other states, including California, have passed laws that require publicly traded companies headquartered in California to have a minimum number of diverse or female directors. For purposes of California law, diverse directors are persons who identify as black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender. .
The developments in California law and the Nasdaq rules described above are the subject of ongoing lawsuits that could be decided at any time. In fact, at press time, a Los Angeles County Superior Court has ruled that one of California’s laws (Assembly Bill 979, requiring a certain number of diverse directors) violates the state constitution. At press time, it was unclear whether California would appeal the decision. Additionally, California Senate Bill 826 (requiring a certain number of female directors) remains in effect, as do the Nasdaq rules, although they are, as noted above, subject to ongoing lawsuits. Classes. At present, the significance of any ruling overriding the California laws is unclear as the Nasdaq rules remain in place and apply to all Nasdaq-listed companies and there is also pressure from other sources for corporations to diversify the composition of their boards, but the prevalence of lawsuits in these areas is worth noting.
In addition to the state legislative developments described above, various institutional investors and proxy advisory services have also adopted diversity voting guidelines. Proxy advisory services such as Institutional Shareholder Services (ISS) and Glass Lewis have adopted policies that take board diversity into account. Beginning in 2021, ISS generally began issuing negative voting recommendations against board members of companies in certain indices if the board of those companies did not include at least one female director. In 2021, Glass Lewis also generally began issuing negative voting recommendations against a nominating committee chair of certain index companies if the board did not include at least one female director. For shareholder meetings starting in 2022, Glass Lewis will generally recommend voting against the chair of the nominating committee of the boards of certain index companies that have fewer than two female directors.
In addition to proxy advisory services, the companies are under pressure from major institutional investors, including BlackRock, Goldman Sachs, State Street, Vanguard and CalPERS. Many institutional investors have adopted various disclosure and voting policies that promote board diversity. For example, BlackRock has publicly stated that it expects to see at least two female directors on every board and reported that in 2021 it cast 1,862 votes against directors globally due to lack of diversity on the board. within the council. Goldman Sachs’ asset management business (Goldman Sachs Asset Management) announced updates to its proxy voting policies, noting that it will expect certain large public companies to have at least one director. diverse from an underrepresented minority ethnic group on their board of directors and that all public companies have at least two women on their board of directors. Even before the implementation of these changes to proxy voting policies, Goldman Sachs announced that it would only undertake IPOs in the United States and Europe if the company concerned had at least one member of the board of directors. diverse directors in 2020. This number increased to two members starting in 2021. Similarly, State Street said it expects boards to have at least one female director and to be able to vote against the chair of the nominating committee if this requirement is not met.
NON-PROFIT SPACE SPILL
Currently, by and large, the initiatives, influences, and requirements described above do not currently apply to nonprofit boards. A notable exception is Maryland, which, as explained above, requires business entities – foreign or domestic, for-profit or not-for-profit – headquartered in Maryland and whose operating budgets or total sales exceed 5 million disclose data on women’s participation on the board in their annual reports. Due to the growing focus on board diversity, we anticipate that key interest groups from all types of entities, including not-for-profit organizations, may request a more diverse composition of boards of directors. And while not yet a formal legal requirement, some nonprofit funders and donors have already focused on diversity on the boards of the organizations they fund and may require the disclosure of certain diversity information in connection with their donations.
KEY POINTS AND POSSIBLE NEXT STEPS
Board diversity continues to be one of the most visible corporate governance topics today. Key stakeholders can begin to urge boards to articulate their board-level diversity goals and strategies, including how the board reflects workforce diversity, the community and other key stakeholders of the entity. As the pressure to diversify boards continues to grow and intensify, boards can begin to take steps to address diversity and prepare to respond to the demands and pressures of their constituents.
While there is no reasonable and immediate solution to undiverse board composition, boards can start laying the groundwork now that will foster greater diversity in the future. Here are some specific practices a board can implement to promote greater diversity:
- Board Questionnaires. To the extent that a board uses a Directors and Officers (D&O) questionnaire, it should be revised to gather information about the diversity of current board members so that the board is able to identify its current diversity and areas where diversity could be improved.
- Annual self-assessment. Routine self-assessments can help boards think critically about their overall performance as well as membership issues, such as succession planning and turnover. A board can use an annual self-assessment to identify areas where diversity could be improved and use this information to help identify, recruit and appoint diverse members.
- Succession planning. As a general rule, a board should regularly engage in succession planning in the event that key individuals decide to leave the board or are otherwise unable to serve on the board. By incorporating diversity considerations into its succession planning, a board can begin to identify, recruit and appoint diverse members.
- Communication. As pressure for diversity continues to grow, we expect key stakeholders, including funders and donors, to urge or request information about board diversity. Boards should start thinking about how they will publish this information and, if their diversity could be considered insufficient, they should also consider whether they could commit to taking or considering other actions to increase diversity.