In August 2021, the SEC approved a proposal requiring Nasdaq-listed companies to disclose board-level demographic details and hit certain thresholds of diversity over time or explain why they do not (comply or explain).
The rule was challenged by the same conservative organization that convinced the Supreme Court to strike down affirmative action, but was upheld by an appeals court last month.
The rule says companies listed on the Nasdaq exchange should report the intersectional (gender + race/ethnicity) makeup of the board as well as the number of directors that identify as LGBTQ+. It also sets specific targets for companies to achieve certain levels of diversity over time – a combination of gender, race/ethnicity, or LGBTQ+ depending on size and number of directors.
While the New York Stock Exchange has no similar guidelines, the disclosure template has become the standard for all US public companies – over 50% of NYSE companies in our universe, and 60% of S&P 500 companies, now disclose intersectional details. However, only 30% also include LGBTQ+ data – 70% of Nasdaq companies, but only 9% of NYSE companies.
As of today, nearly half of all board members of S&P 500 companies are diverse (gender, race/ethnicity, or LGBTQ+), with all companies having at least 20% diversity. However, there are still 3 companies with no people of color – Caesars Entertainment, Chubb, and Digital Realty Trust.
*Note that Nasdaq and many investors do not currently consider Middle Eastern or North African as diverse, while we do track this and we expect it will be added as an additional category in the next few years.
We have seen improvements in the diversity of Russell 1000 companies as well over the past few years, but there are still 2 companies with no women – Souther Copper and Ubiquiti – and 32 companies with no people of color on their board.
Guidelines From Major Investors on Board Member Diversity & Proxy Voting
Board Gender Diversity We expect boards of all listed companies to have at least one female board member and the boards of Russell 3000 companies to be composed of at least 30 percent women directors. If a company does not meet the applicable expectation, State Street Global Advisors may vote against the Chair of the board’s nominating committee or the board leader in the absence of a nominating committee.
Additionally, if a company does not meet the applicable expectation for three consecutive years, State Street Global Advisors may vote against all incumbent members of the nominating committee or those persons deemed responsible for the nomination process. We may waive this voting guideline if a company engages with State Street Global Advisors and provides a specific, timebound plan for either reaching the 30-percent threshold (Russell 3000) or for adding a woman director (non-Russell 3000).
Board Racial/Ethnic Diversity We believe effective board oversight of a company’s long-term business strategy necessitates a diversity of perspectives, especially in terms of gender, race, and ethnicity. If a company in the Russell 1000 does not disclose, at minimum, the gender, racial, and ethnic composition of its board, we may vote against the Chair of the nominating committee. We may withhold support from the Chair of the nominating committee also when a company in the S&P 500 does not have at least one director from an underrepresented racial/ethnic community on its board.
In the U.S., we believe that boards should aspire to at least 30% diversity of membership, and we encourage large companies, such as those in the S&P 500, to lead in achieving this standard. In our view, an informative indicator of diversity for such companies is having at least two women and a director who identifies as a member of an underrepresented group.
We recognize that it may take time and that companies with smaller market capitalizations and in certain sectors may face more challenges in pursuing diversity. Among these smaller companies, we look for the presence of diversity and take into consideration the progress that companies are making.
A board should, at a minimum, represent diversity of personal characteristics, inclusive of at least diversity in gender, race, and ethnicity on the board. Additionally, boards should reflect diversity of other attributes including tenure, skills, and experience.
Board diversity disclosure should at least include the genders, races, ethnicities, tenures, skills, and experiences that are represented on the board. Disclosure of personal characteristics (such as race and ethnicity) should be on a self-identified basis and may occur at an aggregate level or at the director level.
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Gender Diversity We are transitioning from a fixed numerical approach to a percentage-based approach for board gender diversity, as announced in 2022. Beginning with shareholder meetings held after January 1, 2023, we will generally recommend against the chair of the nominating committee of a board that is not at least 30 percent gender diverse at companies within the Russell 3000 index. For companies outside the Russell 3000 index, our existing policy requiring a minimum of one gender-diverse director will remain in place.
Additionally, when making these voting recommendations, we will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline to appoint additional gender diverse directors (generally by the next annual meeting).
Underrepresented Community Diversity We have expanded our policy on measures of diversity beyond gender. Beginning in 2023, we will generally recommend against the chair of the nominating committee of a board with fewer than one director from an underrepresented community on the board at companies within the Russell 1000 index. We define “underrepresented community” as an individual who self-identifies as Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaskan Native, or who self-identifies as gay, lesbian, bisexual, or transgender.
For the purposes of this evaluation, we will rely solely on self-identified demographic information as disclosed in company proxy statements. Additionally, when making these voting recommendations we will carefully review a company’s disclosure of its diversity considerations, and may refrain from recommending that shareholders vote against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline to appoint additional directors from an underrepresented community (generally by the next annual meeting).