Issue link: https://digital.shearman.com/i/1162884
Shearman & Sterling LLP 26 | Turning up the Volume of Board Diversity TURNING UP THE VOLUME OF BOARD DIVERSITY Lona Nallengara and Mark A. Dunham, Jr. INSIGHTS The corporate governance debate among companies, institutional investors and advocacy groups has taken a shift over the last few proxy seasons. There are new entrants in the field and the discussions have moved beyond disclosures in the proxy statement and shareholder proposals. Legislators, on a national and state level, employees and customers are now weighing in on how companies select their leaders, manage themselves and engage with the communities around them. There has also been less of a focus on what may have been considered "procedural" governance issues, such as proxy access and special meeting thresholds, due to a growing number of environmental and social issues that have begun to take center stage in the debate. Chief among these issues is board diversity. Driven by an increased level of external pressure for companies to acknowledge the need to make changes to the "face" of their boards, board diversity continues to feature centrally in internal corporate strategy discussions, investor activism and, most recently, political discourse. The tenor of the conversation on board diversity experienced a notable crescendo in 2017 with the second iteration of the New York City Comptroller's Boardroom Accountability Project, which demanded more than 140 companies to enhance disclosure and engagement on board diversity, and the launch of State Street Global Advisors' "Fearless Girl" campaign, which included a commitment by State Street to engage on diversity with the companies in which it invests. 1 In 2018, BlackRock CEO Larry Fink's annual letter to CEOs signaled the firm's intent to engage companies on having diverse boards, stating that: "Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company's business model. And they are better able to identify opportunities that promote long-term growth." 2 This commitment was reiterated in his 2019 letter to CEOs. Legislators are also trying to influence the debate and direct the action taken by companies. In September 2018, the State of California enacted legislation establishing boardroom gender quotas for California-headquartered companies. State legislators in Illinois, Maryland, Massachusetts, New Jersey and Washington are following suit. Putting aside the constitutionality questions, California's action can be seen as an attempt to accelerate what is perceived to be an agonizingly slow road to board diversity. The debate is no longer limited to whether board diversity is good and how it can strengthen board decision-making. It is now focused on how companies are supporting the development of diverse board talent, how are they changing their director recruitment practices and when there will be meaningful change in board composition. 1 See generally Office of New York City Comptroller, Boardroom Accountability Project 2.0. 2 See Laurence D. Fink, Annual Letter to CEOs, "A Sense of Purpose" (January 2018).