Corporate Governance

2020_Corporate Governance and Executive Compensation

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DIVERSITY IN THE BOARD ROOM Public companies are under increasing pressure from state governments, shareholders, regulators and even underwriters to diversify their board. For example, the states of California and Washington have passed laws mandating certain levels of gender diversity on their boards. 1 Illinois, Maryland and New York have passed laws imposing mandatory board diversity reporting requirements. 2 Additionally, several states — including Hawaii, Michigan, New Jersey and Pennsylvania — are actively considering similar measures. 3 On August 30, 2020, the California legislature enacted Assembly Bill 979, which would require boards of public companies with their principal executive office in California to comply with certain minimum ratios of directors from underrepresented communities. The bill defines an individual from an underrepresented community as a person who self-identifies as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, lesbian, gay, bisexual, or transgender. If signed into law, by the end of 2021, boards must be composed of at least one member of an underrepresented community. By the end of 2022, boards must be composed of a minimum number of directors from underrepresented communities based on the size of the board. 4 In October 2019, The New York City Comptroller's Office launched its Board Accountability Project 3.0 campaign, sending letters to 56 companies seeking the implementation of policies requiring the consideration of qualified women and racially/ ethnically diverse candidates for director and external CEO searches and submitting shareholder proposals at 17 of the targeted companies that did not adequately address its request. 5 Private stakeholders continue to exert pressure on companies to diversify their boards. For example, private equity firm KKR & Co. added at least two diverse directors to each of the boards within its U.S. portfolio of companies, amounting to approximately 70 female or ethnic minority directors. 5 Carlyle Group Inc. set a goal of achieving 30% diversity of all directors on the boards of companies it backs by 2023. 6 In January 2020, Goldman Sachs' CEO stated that Goldman Sachs would no longer take a company public if there was not at least one diverse board director. 7 Additionally, in June 2019, Intercontinental Exchange launched the NYSE Board Advisory Council, a council that will proactively address the lack of diversity on corporate boards. 8 This is in marked contrast to most private company boards. The 2019 Study of Gender Diversity in Private Company Boardrooms found that the majority of private companies did not have a single woman on the board, and that only 7% of board seats were held by women. 9 As a result, private companies considering an IPO may need to actively recruit diverse candidates to comply with applicable laws, make the company attractive to certain investors or to secure an underwriter. 1 See California Corporations Code § 301.3; see also Washington State Women on Corporate Boards Act, SSB 6037. 2 See Illinois H.B. 3394, Maryland S.B. 911, New York Business Corporation Law § 408. 3 See Hawaii H.B. 2720, Michigan S.B. 115, New Jersey S.B. 3469, Pennsylvania H.R. 0114. 4 See An act to amend Section 301.3 of, and to add Sections 301.4 and 2115.6 to, the Corporations Code, relating to corporations, CA A. B. 979 (2020). 5 Michael Garland, Jennifer Conovitz and Yumi Narita, NYC Comptroller's Boardroom Accountability 3.0 Results, Harvard Law School Forum on Corporate Governance,, June 24, 2020. 6 Melissa Karsh, KKR Expands Board Diversity at Its U.S.-Based Businesses, based-businesses-1.1482792, August 20, 2020. 7 The Goldman Sachs Group, Inc., Goldman Sachs' Commitment to Board Diversity, lending/launch-with-gs/pages/commitment-to-diversity.html, February 4, 2020. 8 New York Stock Exchange, Initiative to Advance Board Diversity,, August 20, 2020. 9 Ann Shepherd, Him for Her, Lauren Rivera, 2019 Study of Gender Diversity in Private Company Boardrooms, news/2019-study-of-gender-diversity-in-private-company-boardrooms/, 2019. Preparing for IPO Success: The Transition in the Founder's Role and Corporate Culture | 15 Shearman & Sterling LLP

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