December 21, 2022

Board Diversity: How Investors Might Use Director-Level Disclosure

I blogged a few weeks ago about a new initiative from the “Russell 3000 Board Diversity Disclosure Initiative” that is urging companies to disclose demographic information about directors on an individualized basis. When these requests are made, one question that we often get from clients and directors is: “Why?” Or from the more cynical folks, “Why aren’t investors ever satisfied?”

One reason is that providing the extra info up front could help make the director voting & election process more efficient, in this era of investors needing to apply board diversity voting policies. A member sent this perspective:

First of all, regarding the gap between the requested disclosure and the Nasdaq board diversity matrix, that disclosure is not required for NYSE companies and is always as of a date that is weeks or months earlier than the shareholder meeting. As a result, it captures directors who will be stepping off the board upon completion of the meeting, and does not capture directors who will be joining the board. Shareholders might prefer a matrix that reflects the composition of the board on a going-forward basis. Moreover, there are often cases where one or more directors are listed in the matrix as “did not provide demographic information”, which limits the usefulness of the entire thing.

As for why shareholders might prefer individualized disclosure, I can think of at least two reasons.

1. Shareholders may be reluctant to vote against a board’s only African-American director to protest a lack of women on the board (or vice versa), and having individualized disclosure will help them avoid that outcome. (These things aren’t always apparent from looking at director names, and many companies do not provide photos of their directors.)

2. Shareholders may want to know whether the board’s one Black director and its one female director are the same person, or two different people. In theory it’s possible to figure this out from the Nasdaq matrix, but I’ve seen cases where the disclosure is less than clear – and again, NYSE companies don’t have to provide a matrix at all.

While the policies of proxy advisors and many investors don’t insist on individualized disclosure, it is understandable why some investors might logically prefer it.

As my earlier blog noted, one factor that weighs against making individualized disclosure is that it may create privacy concerns for directors. In addition, some companies and directors are uncomfortable with individualized disclosure because they don’t want to apply labels or contribute to a perception that certain directors were nominated primarily for their gender or ethnicity rather than their specific qualifications and experiences. Related to that, people may not fit into neatly defined, binary categories. These are not easy issues – but an understanding of all of the perspectives can help you and your board weigh the pros & cons.

Liz Dunshee