December 11, 2020

Focus on Company Diversity Practices Coming From All Corners

Liz blogged earlier this year about the rise in premiums for directors and officers (D&O) liability policies. Now after a rise in lawsuits relating to diversity concerns among executives and directors, a recent Business Insurance article says some insurers are starting to take a fresh look at company diversity practices and top-level succession planning before renewing or pricing D&O coverage. The price of D&O coverage fluctuates but in a market when premiums were already rising, this added scrutiny isn’t likely to help matters for some companies.

With investors, proxy advisors and Nasdaq calling for increased diversity disclosures, insurer focus on the issue seems like a natural progression. The article says some insurers have been meeting with companies to better understand diversity plans and inquiring about which directors are retiring and companies’ plans to replace them.

Suggestions for Moving Beyond Numerical Board Diversity Targets

Not too long ago, John blogged about how companies may focus on overboarding as one way to move forward with increasing board diversity. A recent report from The Conference Board, ESGAUGE and others that analyzes Russell 3000 and S&P 500 board composition trends provides several suggestions to help companies move beyond simply setting numerical board diversity targets. Lending credibility to the need to go beyond setting numerical targets, the report cites various stats showing the lack of progress toward greater board diversity.

With investors (and now insurers!) increasingly looking for action and progress on diversity initiatives, companies might want to start thinking about steps they can take to show progress in working toward improved board diversity. Diversity of course goes beyond gender and race/ethnicity and the report discusses the importance of diverse skill sets and age diversity and suggests boards make diversity part of the ongoing board succession planning process. The report offers one take on what boards can do to help improve diversity, and at minimum some of these ideas may help get a dialogue started. The report mentions requiring a diverse slate of director candidates and beyond that, here are more of the report’s suggestions:

– Endorse a model where every other board seat vacated by a retiring board member is filled by a woman or the model described in the recent California law requiring directors from underrepresented communities

– Ensure nominating committees are diverse

– Consider diversity when making board and committee leadership appointments

– Get ahead of investor demands for information about board diversity and include more narrative information about the racial and ethnic background of directors as part of a broader explanation of the multiple dimensions of diversity on company websites.

– When it comes to director tenure, the report says boards should consider how best to achieve a mixture that includes long-serving directors, along with those in the middle and new directors. For disclosure, companies should consider disclosing the range of tenures to investors and consider adopting an average tenure and similar policies that encourage a healthy level of turnover but avoid the shortfalls of rigid term limits.

– Strengthen the director evaluation process to ensure that specific cases of long tenure are examined holistically and in light of other assessment factors such as the board’s overall gender, age, racial and ethnic diversity, skill sets, and rate of board refreshment.

– Look outside the C-Suite for potential director candidates. To help ensure newly minted directors have the requisite experience and abilities, put robust processes in place for identifying, recruiting, onboarding and engaging directors to help them succeed. As companies increasingly seek individuals with specific skill sets, such as cybersecurity and human capital management, looking outside the C-suite can bring different perspectives and problem-solving approaches. Boards should examine their own culture to ensure that they and management are providing a genuinely inclusive environment.

November-December Issue of “The Corporate Counsel”

The November-December issue of “The Corporate Counsel” print newsletter was just posted – and also mailed (try a no-risk trial). The topics include:

– Annual Season Items

– SEC Simplifies Private Offering Exemptions

– SEC Overhauls Regulation S-K Financial Disclosures

– Lynn Jokela