June 12, 2018

Board Diversity: Amazon Adopts “Rooney Rule”

Amazon has amended its corporate governance guidelines to formalize a “Rooney Rule” for director nominees. The company – whose board consists of 7 white men & 3 white women – will now consider at least one woman or minority candidate whenever there’s a board vacancy. In April, Amazon had recommended “against” a shareholder proposal on this topic, but according to this Fortune article – and several notices of exempt solicitations – the company’s unwritten commitment to diversity wasn’t cutting it with employees, shareholders and some members of Congress.

The “Rooney Rule” – named after Dan Rooney, former owner of the Pittsburgh Steelers & former chair of the NFL’s diversity committee – started as an NFL policy that requires teams to interview minority candidates for head coaching and senior operation jobs. It doesn’t give preference to those candidates or impose a quota. This “Harvard Business Review” article discusses Amazon’s new policy – and how to avoid the risk of “tokenism” and resistance to change that can result when there’s a quota mentality. Here’s an excerpt:

Our research, which explored status quo bias, or the desire to preserve the current state of things, found that when there is only one woman or person of color in a finalist pool of job candidates, that candidate stands out so much that they have essentially no chance of being hired. But importantly, we also found that interviewing two women or minority candidates can make the difference and lead to their hiring. So the evidence suggests that mandating diverse candidate slates can improve diversity overall.

This Davis Polk blog notes there are six shareholder proposals on ballots this season that ask for increased board diversity or disclosure about board diversity. And Broc has previously blogged about sample language from other companies that have implemented a “Rooney Rule.”

What’s “Good” Board Diversity? Shareholders Weigh In

This “Rivel Research” survey finds that 67% of institutional investors think that “good” board diversity enhances stock price performance. But “good” diversity is hard to define. It comes down to having board composition that aligns with the company’s business & strategy and helps directors avoid “groupthink.”

About 90% of these shareholders view varied skills & experiences as a “very important” element of diversity – a much higher percentage than gender, geographic, ethnic and age diversity. But at the same time, they don’t think that boards are looking at a broad enough talent pool to find those skill sets: in one shareholder’s words, “the same people get recirculated.”

While most of the shareholders – particularly those in the US – don’t support demographic quotas, almost half of them will vote against boards that lack diversity. And that strategy might be yielding the type of independent thinking they’re looking for, according to this “Harvard Business Review” article:

It’s been found that CEOs who increased the demographic diversity of their boards elicited higher profit margins for the company, but it came at the expense of lower pay for themselves. And using 12 years of data on Fortune 500 companies, other researchers showed that demographically diverse boards are more likely to challenge the authority of the CEO and curtail CEO pay. A McKinsey study showed that only 14% of C-suite executives select board members on the basis of having a “reputation for independent thinking.”

Tomorrow’s Webcast: “D&O Insurance Today”

Tune in tomorrow for the webcast – “D&O Insurance Today” – to hear Holland & Knight’s Tom Bentz, D&O Diary’s Kevin LaCroix, Simpson Thacher’s Joe McLaughlin and Pat Villareal discuss all the latest in the D&O insurance area.

Liz Dunshee