Diversity Issues Remain at Center Stage, and the Show Is Just Getting Started

January 11, 2022


Diversity, equity and inclusion (DE&I) has received unprecedented support in the past year, and trends show that it is here to stay at the forefront of focus areas for corporations and key stakeholders alike.

Some key 2021 highlights in the DE&I space include:

  • Support for diversity and representation on boards has again made strides, building on the momentum from past years. 2021 saw a greater focus on racial diversity than gender diversity, and we expect this focus to continue in 2022.
  • Diversity-related shareholder proposal numbers increased, and many proposals deviated from the traditional disclosure-based proposals and were more action-oriented. Support for shareholder proposals was also higher than ever before, and with the SEC’s new guidance on no-action letter requests, public companies face increased pressure to engage with proponents and agree to their requests.
  • Corporate disclosure of diversity and broader DE&I efforts has increased in tandem with the general trend in increased human capital management and ESG disclosure in the market in response (in part) to increased shareholder demand. The Nasdaq diversity disclosure rules were also approved and set to take effect in 2022, and many NYSE companies are voluntarily following suit.

Unsurprisingly, such rapid progress is also being met with some concern, as the increased momentum stress-tests corporate disclosure and hiring practices and capabilities, and the increased demand for board diversity information raises considerations about data privacy and the sensitivities surrounding some of the information being requested.

Board Diversity in 2021: Significant Progress With Room to Grow

Significant Improvement of Diversity on S&P 500 Boards

We saw the most diverse class of S&P 500 directors in 2021: 72% of all new directors identified as being either female[1] or from a historically underrepresented racial/ethnic group.[2] Racial and ethnic diversity in particular made substantial strides, with 47% of new independent directors identifying as racially/ethnically underrepresented, compared to 22% in 2020.[3] Specifically, 33% of all new independent directors in the 2021 proxy year identified as Black/African American, a huge jump from just 11% the previous year.[4] New independent directors identifying as Asian or LatinX lagged behind new Black/African American independent directors at 7% each.[5] Looking at all S&P 500 directors in 2021, one-fifth identified as racially/ethnically underrepresented[6] –  while there is still plenty of room for further diversity, these numbers show unprecedented progress with no signs of slowing down in 2022.

Unfortunately, at the same time we also saw a decrease in new female directors. Only 42% of new independent directors in the S&P 500 identified as female in 2021, a 5% decrease from 2020, when almost half of all new S&P independent directors identified as female.[7] Overall female representation on S&P 500 boards increased to 30%, up from 28%, but it will be interesting to see whether this growth continues to slow in the coming year.[8] Racially/ethnically underrepresented female directors did not gain as much traction as other demographic groups, with only 18% of the new S&P 500 independent directors identifying as both female and racially/ethnically underrepresented and comprising 10% of the overall representation on S&P 500 boards.[9]

Taken together, these statistics have given rise to the concern by some that board representation may be viewed as a zero-sum game – even though it clearly does not have to be (nor should it be). Given the increasing focus on racial/ethnic diversity, we expect that we may see racially/ethnically underrepresented men continue to outpace women and racially/ethnically underrepresented women in gaining new board appointments in 2022. As the focus on board diversity continues, we hope that fewer people will see director appointments as strictly being limited to only when existing directors retire, and more opportunities will be created for women, racially/ethnically underrepresented professionals and other historically underrepresented groups alike to gain a seat at the table.

Key Obstacles: Director Vacancies, Diverse Candidate Pools and the Board Leadership Glass Ceiling

One key obstacle that companies have increasingly encountered when trying to further their DE&I initiatives is the lack of open board seats that can be filled with underrepresented candidates (and perhaps the reason that some may be taking the zero-sum game approach to board diversity). Despite age caps, tenure caps and other board policies and approaches companies use to promote refreshment, boards still generally have very low turnover rates.[10] While there is significant benefit to having longer tenured directors on the board, companies will need to be creative about how they can allow for continued diversification in the meantime. One idea that has gained some momentum is the approach of increasing the size of boards (permanently or temporarily) in order to increase representation while sitting members have not yet retired.[11] However a company chooses to proceed, it has become clear that a “sit and wait” strategy for current directors to retire will not be sufficient in the long-term, and given institutional investor pressure, companies will need to think about how to be more proactive in their diversity efforts.

Another common concern voiced by companies has been the lack of an adequately diverse candidate pool. Despite various diversity recruitment efforts, new white male independent directors every year still far outpace every other demographic group.[12] Building a more diverse candidate pool will require expanding the search beyond the traditionally white male-dominated CEO/C-suite backgrounds and including individuals who have other relevant and valuable skillsets and experience. An analysis done by Deloitte and the Alliance for Board Diversity showed that “women and minority board members currently are more likely than white men to bring experience with corporate sustainability and socially responsible investing, government, sales and marketing, and technology in the workplace to their boards. These skills are on the forefront of growth in a post pandemic economy and less than 55% of board members in the Fortune 500 report having any one of these skills.”[13] As companies have increasingly seen, working to identify which non-traditional skillsets and experiences would most benefit the company and curating candidate pools with more holistic criteria in mind (e.g., thinking about what other benefits, perspectives and value that underrepresented candidates can bring to the table) generally also makes for a more effective board.

Despite the progress we have seen with respect to overall board representation, diversity in key leadership roles at the board is still an area in which stakeholders are looking for improvement. In 2021, 96% of S&P 500 boards included two or more female directors (compared to 58% a decade ago), and 72% had three or more female directors.[14] When looking at board leadership positions, however, female directors accounted for only 8% of independent board chairs and 14% of lead directors across all S&P 500 boards.[15] Fortune 500 boards have not fared much better: between 2012 and 2020, there has only been a modest 5% increase in the number of chair positions held by female and racially/ethnically underrepresented directors.[16] At the committee level of Fortune 500 boards, while there have been modest increases in female director appointments to the audit committee and compensation committee chair positions, the rate for racially/ethnically underrepresented directors has stagnated since 2012 and even slightly decreased since 2016 for audit committee chair appointments, and it has only increased by approximately 2% for compensation committee chair appointments.[17]

None of these obstacles should undermine or overshadow the significant progress that has been made in the DE&I space in a relatively short period of time, but it does highlight that there is still more work to be done, and DE&I issues and initiatives will remain at the forefront of stakeholders’ minds as a key area of focus on their governance agendas.

Shareholder Activity: Support For Diversity Proposals Skyrockets in 2021

2021 saw a significant increase in diversity and anti-discrimination proposals, with unprecedented shareholder support averaging 44% (compared to 22% in 2020).[18] Eleven diversity-related proposals passed in 2021, more than doubling from the year prior, and support reached as high as 94% (at IBM, for a proposal requesting a report on the effectiveness of workforce DE&I efforts, which also passed at a few other companies).[19] Other board diversity report proposals that passed also received overwhelming support (between 71% and 91%).[20] Two proposals on EEO-1 disclosure policies from the NYCC also passed at DuPont and Union Pacific in 2021, receiving 84% and 86% support, respectively.[21]

The laser focus that stockholders have shown regarding diversity has only increased in the past year with the introduction of proposals requesting companies to conduct racial equity audits, which “generally seek an independent, objective and holistic analysis of a company’s policies, practices, products, services and efforts to combat systemic racism in order to end discrimination within or exhibited by the company with respect to its customers, suppliers or other stakeholders.”[22] In their inaugural year, eight of these proposals made it to a vote and averaged approximately 33% support[23] – a level of support that the market has rarely seen for new ESG proposals. While none passed last year, the proposals at Amazon and JPMorgan Chase received the highest support at 44.2% and 40.5%, respectively, which is approaching majority support.

Given the significant support we saw in 2021 for racial equity audit proposals and the likely possibility that we will see majority support for these proposals in 2022, we expect companies will face increased pressure to engage with proponents of racial equity audit proposals in the coming months. Companies like BlackRock and Morgan Stanley have both committed to conducting racial equity audits after receiving shareholder proposals requesting them last year, and we expect more companies will follow suit in the wake of the 2022 proxy season.

Although social proposals typically experience higher rates of withdrawal after successful shareholder engagement than exclusion upon being granted no-action relief,[24] the pressure to engage with proponents rather than try to exclude diversity proposals by requesting no-action relief from the SEC is further increased by new Staff Legal Bulletin 14L[25] released in November 2021, which eliminated the nexus requirement between a significant policy issue and the company’s business for purposes of arguing for exclusion under Rule 14a-8(i)(7) (management functions/ordinary business operations). Under the new guidance, any proposal that “focuses on a significant social policy” will not be excludable under Rule 14a-8(i)(7), regardless of whether the significant social policy has a meaningful connection to the company’s business. There is little doubt that DE&I initiatives broadly fall within the SEC’s rubric of significant social policy for purposes of Rule 14a-8(i)(7), which limits the possible grounds under which companies may argue for exclusion of any DE&I-related proposals they receive. 

Disclosure Trends: When It Comes to Diversity, More Is More

In response to increased shareholder demand, developing laws and regulations and stock exchange rules, companies have noticeably increased their diversity disclosures over the past year. Looking at S&P 500 companies, 59% disclosed the racial composition of their boards in 2021, up from 24% in 2020.[26] We expect to see even higher numbers in the coming year, as pressure continues to be placed on companies. Nasdaq’s board diversity matrix disclosure rules were finalized in 2021, and even in spite of ongoing litigation challenging the SEC’s approval of the Nasdaq rule,[27] both Nasdaq companies and a number of NYSE companies have been implementing (on a voluntary basis for NYSE companies) diversity matrix disclosure questions on D&O questionnaires and including the results in the company’s public disclosures.

Additionally, BlackRock published its proxy voting guidelines in December 2021, which stated that BlackRock “may vote against members of the nominating/governance committee . . . [if] based on our assessment of corporate disclosures, a company has not adequately accounted for diversity in its board composition.”[28] In discussing what it meant by diversity representation on boards, BlackRock clarified that it “believe[d] boards should aspire to 30% diversity of membership and encourage[d] companies to have at least two directors on their board who identify as female and at least one who identifies as a member of an underrepresented group.”[29]

More companies have also experienced pressure to increase disclosure about the diversity of their broader workforce. As discussed above, EEO-1 Report shareholder proposals gained considerable momentum in 2021, and investors have increased pressure on companies through other campaign initiatives. For example, the New York City Retirement Systems reported in April last year that “62 S&P 100 firms now disclose or have committed to disclosing their EEO-1 data as a result of its letter-writing campaign begun last July [2020, up from just 14 prior to their campaign].”[30] State Street announced that, starting in 2022, it will begin voting against compensation committee chairs at S&P 500 companies that do not disclose EEO-1 reports.[31] In November 2021, a group of investors including Boston Trust Walden, Connecticut State Treasurer, Illinois State Treasurer, Washington State Investment Board and 59 other investor organizations sent a letter to Chairman Gensler urging “the SEC to incorporate the suggestion of Commissioner Allison Lee to require companies to publicly disclose their EEO-1 reports documenting the gender, race, and ethnicity of employees across job categories.”[32]

Pressure to provide diversity disclosure, including both board/management diversity statistics and workforce EEO-1 reports has also come from the SEC itself: SEC Commissioners Lee and Crenshaw have both publicly emphasized the importance of diversity as a focus issue for investors and commented on the SEC’s silence in addressing these topics in prior disclosure rulemaking.[33] Although the SEC’s immediate focus seems to be to address climate and environmental disclosures, it would not be surprising if the SEC under the current administration also turns to addressing diversity and broader human capital management disclosure in the not-too-distant future.

When considering diversity disclosure and setting up infrastructure to collect the requisite data for such disclosure, companies should keep a few key considerations in mind. One main consideration, particularly for foreign private issuers and companies with international directors, is ongoing compliance with both domestic and foreign data privacy laws around the collection, treatment and retention of the personal information required for diversity disclosures. For example, while a company might typically want to maintain copies of D&O questionnaires for a longer period of time, there may be limitations under Europe’s GDPR and European local privacy laws that restrict how long personal data of individuals may be kept. Additionally, since providing the personal information going into these diversity disclosures is still voluntary in most cases, companies should also think about how to craft their disclosure narrative if directors decide not to voluntarily disclose the information to the company and what reasons the company should give in response to Nasdaq requirements or otherwise.

Looking Ahead to 2022

Looking at the lessons learned during the 2021 proxy season, we expect that diversity issues will remain at the forefront of the 2022 proxy season’s shortlist of top focus areas. Momentum in pushing for increased diversity representation and diversity disclosure has stayed strong and shows no sign of waning, and we expect that trend will continue in the coming year (and beyond), given how far the market has to go in making improvements in these areas. As with any fast-evolving space, we also expect there will be increased engagement and dialogue between companies and key stakeholders as new obstacles, concerns and considerations spring up along the path of progress. We do not expect that the momentum will falter in the face of these issues, but it certainly will provide opportunities for creating meaningful discussion about how stakeholders can better work together to make long-lasting and sustainable advancement in the diversity space.

[1] Statistics on other historically underrepresented gender groups is not yet readily available, as the current focus of the market remains on (cis)female gender diversity and racial/ethnic diversity.

[2] Spencer Stuart, “2021 U.S. Board Index” (October 2021), available here.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Maria Moats and Paul DeNicola, “You Say You Want a More Diverse Board. Here’s How to Make It Happen” Harvard Business Review (March 11, 2021) (“According to a recent report, nearly half of America’s largest publicly-traded companies made no changes to the makeup of their board of directors in the last year.”), available here.

[11] See, e.g., id.; The Conference Board, “Corporate Board Practices, 2021 Edition” (“In addition, directors could temporarily increase the size of the board, introduce (and adhere to) overboarding restrictions, and adopt guidelines on expected board tenure.”), available here.

[12] Id.

[13] Alliance for Board Diversity & Deloitte, “Missing Pieces Report: The Board Diversity Census of Women and Minorities on Fortune 500 Boards, 6th edition” (2021), available here.

[14] Spencer Stuart, “2021 U.S. Board Index” (October 2021), available here.

[15] Id.

[16] Alliance for Board Diversity & Deloitte, “Missing Pieces Report: The Board Diversity Census of Women and Minorities on Fortune 500 Boards, 6th edition” (2021), available here.

[17] Id.

[18] Data sourced from Proxy Analytics.

[19] Id.

[20] Id.

[21] Id.

[22] Harvard Law School Forum on Corporate Governance, “Racial Equity Audits: A New ESG Initiative” (October 30, 2021), available here.

[23] Data sourced from Proxy Analytics.

[24] Id.

[25] SEC, “Staff Legal Bulletin 14L” (November 3, 2021), available here.

[26] The Conference Board, “Corporate Board Practices, 2021 Edition”, available here.

[27] Alliance for Fair Board Recruitment v. SEC (5th Cir. 21-60626) (ongoing); see Alliance for Fair Board Recruitment, “Nasdaq Board Diversity Quotas Challenged in Federal Court by the Alliance for Fair Board Recruitment” (August 18, 2021) (“According to AFFBR, the Nasdaq rule will compel many of our nation’s largest publicly traded corporations to illegally discriminate on the basis of gender, race, and sexual orientation in selecting directors”), available here.

[28] BlackRock, “BlackRock Investment Stewardship—Proxy Voting Guidelines for U.S. Securities” (effective as of January 2022), available here.

[29] Id.

[30] Harvard Law School Forum on Corporate Governance, “2021 Proxy Season Review” (August 5, 2021), available here.

[31] Id.

[32] Investor Letter “Re: Investor support for mandating disclosure of EEO-1 workforce composition data” (November 18, 2021), available here.

[33] See, Commissioner Allison Herren Lee, “Regulation S-K and ESG Disclosures: An Unsustainable Silence” (August 26, 2020), available here; Commissioner Caroline Crenshaw, “Statement on the ‘Modernization’ of Regulation S-K Items 101, 103, and 105” (August 26, 2020), available here.