December 1, 2022

Board Diversity: Investor Coalition Wants Disclosure About Individual Directors

I blogged yesterday about a drop in board gender diversity at big US banks, the impact that big asset managers have had on US board demographics, and impending “comply or explain” board diversity targets for UK-listed companies. But there is even more to say on this topic!

A couple of weeks ago, the “Russell 3000 Board Diversity Disclosure Initiative” – an investor coalition that is co-led by the State Treasurers of Illinois and Connecticut – announced that it had sent its annual letter to Russell 3000 companies, requesting more detail on the racial, ethnic & gender composition of the board.

We blogged about this coalition a couple of years ago when it launched. This year, there are three versions of the letter, customized for:

Top performers: 386 companies provide “exemplary disclosure” of the demographics of individual directors, often via a matrix

Middle performers: 1,847 companies provide disclosure on an aggregate basis or only for certain directors

Bottom performers: 702 companies do not provide board race, ethnicity and gender in public filings

The letters highlight the benefits of disclosure on an individual director basis and call on the “middle” & “bottom” performers to up their game – based on self-identification from directors. This blog from Perkins Coie’s Allison Handy provides three considerations for companies that received the letter:

1. The letters are framed as a request for disclosure, not as a proposal, demand, or new voting policy. The letters refer to voting policies of organizations included in the initiative, such as versions of “vote against” policies for companies with no board diversity and/or no board diversity disclosures.

They note that some member organizations are considering strengthening board diversity voting policies and expanding engagement on this topic. We are not aware of any announced voting policies that would penalize a company that reports board diversity information on an aggregate, rather than individual, basis. In light of this framing, many companies may decide that no direct response is needed at this time.

2. The gap between the requested disclosure and the Nasdaq board diversity matrix is not clearly articulated. It is worth noting that the Nasdaq matrix is intended to provide decision-useful diversity disclosures that are comparable across companies. The Nasdaq matrix requires disclosure of specified racial and ethnic characteristics, disaggregated by gender. The press release and letters from the initiative call for individualized disclosure, but do not explain why investors need individual, rather than aggregate, diversity data.

Currently, large institutional investor and proxy advisor policies addressing board diversity disclosures generally accept either individual or aggregated diversity information. If a company does decide to engage with investors involved in this initiative, it might consider seeking clarity on why individualized disclosures are important.

3. Some directors may have privacy concerns about individualized disclosures. As acknowledged in Corp Fin’s Regulation S-K CDIs 116.11 and 133.13, as well as Nasdaq’s board diversity rules, companies need the consent of directors to disclose personal, self-identified diversity characteristics.

Not all directors are willing to have their diversity characteristics disclosed on an individualized basis, and companies may face more pushback on disclosure when disclosure is made on an individual, rather than aggregate, basis. Before committing to a new disclosure regime requested by investors, companies should consider these potential privacy concerns.

Check out our “D&O Questionnaire Handbook” for guidance on how to ask directors about their demographics, and our “D&O Biographical/Director Qualifications & Skills Disclosure” for more guidance about disclosures.

Liz Dunshee