Board governance, executive practices and diversity in 2021
With many organizations redoubling their commitments and efforts around diversity and inclusion last year, regulators and watch dogs are preparing to bring increased accountability to that work. In the latter half of 2020, there were at least three notable signals of regulator-driven monitoring and reporting of diversity-related metrics:
- On December 1, 2020, the NASDAQ stock market filed a proposed rule with the Securities and Exchange Commission to adopt diversity-related disclosure requirements for companies listed on NASDAQ’s stock exchange. The rule proposed, among other things, that:
- companies must have at least one diverse director (or explain why not) within two years of the rule’s effective date;
- companies must have at least two diverse directors (or explain why not) within four years of the rule’s effective date; and
- companies must report board composition and diversity annually using a uniform “Board Diversity Matrix” format (proposed version included with the rule).
- In September 2020, California enacted legislation requiring each publicly held corporation, whose principal executive offices are located in California, to have a minimum of one director from an “underrepresented community on its board of directors by December 31, 2021.”
- An increasing number of large institutional investment firms are developing guidelines for “voting against” companies that lack sufficient board diversity. In November 2020, one of the largest advisors to hedge funds and mutual funds, Institutional Shareholder Services, announced policy changes specific to ethnic and racial diversity on boards of Russell 3000 or S&P 1500 companies.
Like California, many states are considering or enacting legislation around board diversity and reporting, buoyed by data and analyses that diverse-governed organizations produce better results. There is also a growing trend toward using Environmental, Social and Governance (ESG) criteria toward investing decisions, which include consideration of leadership and governance diversity. While these trends are currently focused on publicly traded and for-profit companies, the governance principles espoused have equivalent merit as applied to private and non-profit companies.
Executive hiring, promotion and compensation will also likely be scrutinized with a diversity lens in 2021. Organizations are, or may be, considering practices such as:
- Following some version of the NFL’s “Rooney Rule” (i.e., requiring all open positions include consideration of at least one diverse candidate)
- Eliminating or reducing reliance upon subjective criteria in performance reviews in favor of more objective criteria
- Blinded comparisons of performance scores and compensation to ensure comparable levels of performance are being comparably compensated
- Using “blind” hiring practices (i.e., removing personally identifiable information from candidates’ resumes and CVs)
These board governance and executive employment practices provide valuable opportunities for organizations to meet their commitments to diversity and inclusion principles with measurable actions and results. For those who delay or choose not to do so, they should expect scrutiny from various regulators (and likely the media).