ISS’ Proposed Board Diversity Policy Change: Aggregated Data Won’t Cut It
The comment period for ISS’ policy changes closes at 5 pm EST today, and when Liz wrote about the potential changes a couple of weeks ago, one U.S. change that has received a fair amount of attention is the proposed change relating to board diversity. Under that proposed policy, beginning in 2022, at companies where there are no identified racially or ethnically-diverse board members, the proposed U.S. policy will be to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis). If the proposed policy is adopted, all companies in the Russell 3000 and S&P 1500 indexes would be subject to it.
As stated in ISS’ proposed policy changes document, as of Sept. 21, 2020, 1260 of the Russell 3000 companies, 492 of the S&P 1500 and 71 of the S&P 500 do not have minority ethnic and/or racial board representation. The document also states that in 2021, ISS research reports will highlight boards that lack racially or ethnically diverse board members (or lack disclosure of such) to help investors identify companies they may want to engage with to foster dialogue on the topic. A recent AgendaWeek piece (subscription required) includes commentary from Marc Goldstein, head of U.S. research at ISS, that sheds more light on information ISS wants to see:
‘The real problem for us is when companies disclose diversity and then aggregate race, ethnicity and gender all together and say, for example, that ‘30% of our board is diverse,’ but then they don’t say what that means,’ says Goldstein. ‘We don’t consider that good enough.’
Instead, says Goldstein, ISS wants to see companies that haven’t provided specific disclosure to disclose what percentage of the board is composed of women, what percentage is racially diverse, and what percentage is ethnically diverse. ‘We want to see gender diversity separated out from racial and ethnic diversity. And obviously, there are other ways to define diversity too, including background, thought, nationality — lots of things. But we’re specifically interested in racial and ethnic diversity for the purposes of this policy.’
ISS expects to announce its final 2021 benchmark policy changes in the first half of November, so we’ll find out soon if the proxy advisory firm adopts this board diversity policy. In the event that ISS adopts this policy change, given that ISS research reports will begin flagging companies for lack of disclosure in 2021, even companies that have historically included aggregated director diversity information in their proxy statements might want to consider updating their disclosure or prepare for potential questions from investors.
-Lynn Jokela, TheCorporateCounsel.net October 26, 2020
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