Did Board Diversity Change in 2021?
Even though Nasdaq’s new board diversity rules were approved by the Securities and Exchange Commission (“SEC”) in August 2021, most public companies will not be required to comply with the rules’ standards until 2023, assuming the rules are not overturned based on the legal challenges they are currently facing. (Nasdaq, Rule 5605(f); Bre Bradham and Patrica Hurtado, Bloomberg Law). However, other corporate diversity advocates, including shareholders and institutional investors, are currently pushing for greater diversity on boards of directors and company disclosures stating the racial and gender make-up of the board of directors (“board”). (Francesca L. Odell and Shuangjun Wang, Cleary Gottlieb). As a result, companies are making progress with hopefully more to come in the future.
First, according to data reported by S&P 500 and Russell 3000 companies, board diversity increased on many fronts. (Spencer Stuart; Peter Eavis, The New York Times). During the 2020 – 2021 proxy season, of the 456 newly elected independent directors to S&P 500 companies, 47% (29% men and 18% women) identified as a member of an underrepresented ethnic/racial group, a 25% increase from the prior 2019 – 2020 proxy season. (Spencer Stuart, 2021 U.S. Spencer Stuart Board Index). Of the 47%, one-third identified as Black/African American, which was three times more than the prior proxy season, and 7% identified as Hispanic/Latino(a), an increase of 3% from the prior proxy season. Id. While ethnic/racial diversity improved, gender diversity did not. In the 2020 – 2021 proxy season, only 43% of newly elected directors identified as female, a 4% decrease from the prior proxy season. Id. However, 30% of all S&P 500 directors were women, a 2% increase from the prior proxy season, and 10% of that group also identified as part of an underrepresented ethnic/racial group. Id.
Second, according to recent data reported by Russell 3000 companies, the number of Black, Asian, Hispanic, and Middle Eastern directors of Russell 3000 companies increased 25% from 2020 to 2021, with such directors holding 4,500 of 27,091 available board seats. (Peter Eavis, The New York Times; Gender Diversity Index, 50/50 Women on Boards Gender Diversity Index). Of the directors at these companies, persons from underrepresented groups made up 17% of the board seats in 2021, which is a 3% increase from 2020. Additionally, women accounted for 24% of the board seats, close to a 3% increase from 2020. (The Conference Board, PR Newswire).
Third, in conjunction with the push by shareholders to disclose board diversity metrics, 60% of S&P 500 companies disclosed the ethnic and racial composition of their boards and 39% indicated that the company had policies in place to include underrepresented groups in their pools of potential new board candidates. (Spencer Stuart).However, only 6% of S&P 500 companies disclosed information about the LGBTQ+ status make-up of its board. Id. The number of Russell 3000 companies disclosing board diversity metrics also increased from 7.7% in 2020 to 26.9% in 2021, a significant stride for disclosure efforts, but still well behind the S&P 500 disclosure rate. (The Conference Board, PR Newswire).
Finally, shareholders are also showing their support for diversity initiatives. During the 2021 proxy season, companies saw an increase in shareholder proposals related to diversity and anti-discrimination concerns with 44% of shareholders supporting these initiatives, a 22% increase from 2020, and eleven shareholder-diversity proposals passing. (Francesca L. Odell and Shuangjun Wang, Cleary Gottlieb). Many of these proposals contain requests for reports on DE&I initiatives, overall workforce diversity, and audits regarding racial equity. Id.
While at first glance, these diversity metric increases trend in a positive direction, significant concerns persist. 78% of the newly appointed directors at the S&P 500, S&P MidCap 400, and Russell 3000 were white. (The Conference Board, PR Newswire). Additionally, newly appointed (1) African American, (2) Hispanic/Latino(a), and (3) Asian, Hawaiian, or Pacific Islander directors marginally increased by 0.2%, 0.5%, and 0.2%, respectively, from 2020 to 2021. Id.
While companies are heeding the call to increase diversity in the board room and provide increased board diversity disclosures, many newly appointed directors are also former executives and high-ranking business leaders. (Peter Eavis, The New York Times). According to data from 2021, 81% of all chief executive officers (“CEOs”) were white while Hispanic/Latinos held 7%, Asians held 6.8%, and Black/African Americans held 3.2% of the CEO positions. (Zippia). Additionally, approximately 64% of all CEOs were men and 31% were women, with only 12% of all CEOs identifying as LGBT. Id. If prior executives are the main pool from which board candidates are recruited, companies could promote potential candidates from underrepresented groups to senior positions in order to help increase the diversity of the director candidate pool. (Peter Eavis, The New York Times). As one commentator noted “leadership teams that reflect the diversity of our communities and our world are the ones best fit for the future.” (Halla Tómasdóttir, Fortune).
Companies also need to look to other categories beyond former executives and high-ranking business leaders to identify a more diverse pool of potential candidates, which could be more time consuming and require better long-term planning as those potential candidates are not as easily identified. (The Conference Board, PR Newswire). Finally, companies should place more importance on a board candidate’s skills over titles (i.e., chief financial officer), which could assist in recruiting and retaining diverse candidates as directors. (Peter Eavis, The New York Times).
Board diversity remains a priority for shareholders and many companies. Shareholder activism will continue to exert pressure on companies and thus induce more companies to create a diversified board room. Via broad corporate trends and increased shareholder activism, the racial and gender make-up of company board rooms will accurately represent and reflect the make-up of the United States population.