Issue link: https://digital.shearman.com/i/1162884
Shearman & Sterling LLP 28 | Turning up the Volume of Board Diversity Investor Pressure and Shareholder "Activism" Institutional investors declaring their support for more board diversity have quickly shifted to making more concrete demands, including numerical expectations and even quotas. As part of its Fearless Girl campaign, State Street announced the aggregate numbers of directors and nominating committee chairs it has voted against in light of failures by these companies to add women to their boards. State Street's 2019 guidelines state an expectation that boards have at least one female director. BlackRock expects companies to have two. Both also want clear criteria for a director to be considered diverse, like ethnicity and gender. More importantly, institutional investors focused on this issue want to have a meaningful dialogue with companies to learn how they are thinking about and approaching the challenges of building a more diverse board. State Street and BlackRock have both tied their voting decisions, in part, to whether or not a company has engaged with them on board diversity. State Street's 2020 guidance states that failure to have one woman on the board and engage with them on diversity may result in a vote against the entire nominating committee. Proxy advisory firms are also significant influencers of change. Although Glass Lewis and ISS may have ceded the driver's seat on this issue to institutional investors, both want to see more female directors and their stated policies indicate that they would consider voting against a nominating committee where women are not present on the board. Finally, advocates are also submitting shareholder proposals to pressure boards to adopt policies regarding director recruitment and selection that are designed to develop a more diverse board. Companies faced with such shareholder proposals are faced with a difficult dilemma when they cannot negotiate a compromise to have the proposal withdrawn — do we try to exclude the proposal by arguing the company already adequately considers diversity, do we recommend voting against the proposal or do we just go along? For many companies, doing anything other than the third option may be untenable from the public and investor relations perspective. Legislative Actions State and federal legislators have also been focused on board diversity. California's board diversity law requires companies headquartered in California with shares listed on a major U.S. stock exchange to have at least one female director by the end of 2019, and by the end of 2021, boards with five directors are required to have two female directors and boards with six or more directors must have three. 6 Failure to comply with the law could result in fines. According to a 2018 study of the companies headquartered in California that were in the Russell 3000 Index, based on board composition as of September 2018, 377 companies will have to add female directors to their boards in order to be in compliance with the new law. 7 The law has been, and is expected to continue to be, challenged on constitutional and state law grounds, including under equal protection or internal affairs doctrine analyses. While the California board diversity law is the only binding statute requiring board gender diversity, other states have focused on the issue prior to, and following, the law's enactment, and a few states have passed non-binding resolutions. Currently, New Jersey and Massachusetts are considering legislation similar to California's in scope. Although not yet in force, in June 2019, Illinois passed legislation which mandates that publicly traded companies in Illinois report on their websites the demographics of their board and executive ranks, as well as plans for promoting diversity in the workplace. The U.S. Congress has also been active in this area. In July 2019, the House of Representatives' financial services committee passed two bills that would require that the SEC implement rules that would require all public companies to disclose diversity data in their proxy statements. Although this is a long way from mandating quotas (and these bills are also a long way from becoming law), focus on this issue from Congress could increase the volume of the debate. 6 See California Senate Bill No. 826; see also H.R. 1016, "Improving Corporate Governance Through Diversity Act of 2019" (February 9, 2019). 7 See Annalisa Barrett, "How Many California Companies Have To Add Women To Their Boards" (October 1, 2018).