The Global Perspective on DEI and HCM

The text below is an auto-generated transcript of the conversation from our recent webinar. It has been shortened and edited for readability. Please forgive any typos. For the truest version of the conversation, listen to the video. 

Maria: Welcome, everyone! Thank you, Josh and DiversIQ, for leading this discussion. Moving from the UK to the US made me realize how differently the two countries think about DEI and HCM. As CEO of the US Sustainable Investment Forum, I’ve witnessed diversity’s impact on corporations firsthand.

Building the FAIR initiative demanded a diverse team with varied perspectives and energies. Upon returning to the US, I encountered different approaches to diversity, there was a real learning curve. Despite the nuances, diversity remains both a challenge and opportunity, globally and locally.

Investor surveys underscore DEI’s significance in investment decisions, ranking just below climate and energy transition. I commend DiversIQ for spotlighting global DEI perspectives crucial for identifying investment opportunities.

In closing, I look forward to insights from our expert panel. Thank you, Josh

Josh: I’m Josh Ramer, CEO of DiversIQ, established in 2021 to consolidate human capital and diversity data for informed decision-making. Our platform aids investors in advocating for transparency and helps companies enhance talent acquisition and retention.

Today, companies voluntarily share more data, acknowledging the relevance of workforce insights to investors and employees alike. Despite varying regulatory frameworks globally, investor demand drives this trend.

Though DEI and ESG are often grouped, the focus on workforce diversity remains paramount. Recent headlines proclaimed a decline in DEI and ESG discussions, but internally, companies continue refining their cultures and practices.

Investors persist in seeking transparency, setting targets, and driving progress. The Just Capital surveys reaffirm that workers’ rights, fair wages, and work-life balance top the list of corporate priorities for Americans.

Some investors seek additional evidence, but the business case for diversity and human capital is well-established. Companies recognize the importance of reflecting society’s diversity in their workforce and practices.

Regardless of political shifts, transparency, and workforce management have become standard expectations for companies. They provide insights into organizational values and future directions.

Now, I’ll pass it on to Rekha or Kim for further insights.

Rekha: I’m Rekha from CalSTRS, part of the Sustainable Investment Stewardship Strategies team. Our work focuses on corporate engagement and proxy voting across our portfolio, including private markets and our net-zero strategy.

Today, I’m intrigued to delve into HCM, DEI globally, and its implications for our portfolio companies. The shifting political landscape prompts questions about the impacts of affirmative action rulings on companies, especially those with federal funds or political ties.

After extensive dialogues with portfolio companies, many are maintaining their DEI efforts, albeit with subtle language adjustments. We’ve long advocated for comprehensive DEI practices, which companies recognize as value-generating. Those embracing DEI report enhanced talent pipelines and other benefits.

Investors, including us, maintain expectations for robust DEI practices. Peers have either maintained or raised DEI expectations, signaling momentum toward progress.

In Japan, companies are increasingly addressing employee engagement, particularly crucial within entrenched seniority systems. This growing emphasis on human capital reflects global trends and investor interests.

I’ll pass it over to Kim now. 

Kim: I’m Kim Strand, a portfolio manager at Franklin Templeton, leading our sustainable investing practice within the multi-asset solutions team. Our investments span various asset classes, and we consider DEI a crucial factor. I’m deeply involved in our firm’s operational DEI strategy, working closely with our Chief Diversity Officer, Regina Curry, and our CEO, Jenny Johnson, who prioritizes DEI globally.

As a multi-asset and global investor, regional differences shape our approach to sustainability factors like DEI. The varying regulatory landscapes and disclosure requirements add complexity to our analysis. Achieving consistent disclosures remains a challenge, especially across different US states. Our task is to develop a consistent framework using both quantitative and qualitative data, aligning with our investment principles.

Returning to basics, we must reassert the business case for DEI, separating moral imperatives from financial materiality. Emphasizing the long-term benefits of DEI underscores its strategic importance, demanding patience and a comprehensive, long-term view in our evaluations.

Josh: Rekha or Kim, are you seeing any major differences now versus 12 months ago as you go into your engagements? As you look ahead to proxy season or as you talk to different participants in the industry, what changes have you seen? 

Kim: Over the past year, despite some negative headlines, we’ve made significant strides in engaging with corporates. With improved data and regulations like SFDR in Europe, global asset managers like us are better equipped for conversations with companies. Although there are challenges, Europe is driving progress, and we’ve seen adoption in regions like Asia Pacific.

Rekha: I agree. Many companies have maintained their commitments, while some have strengthened them to navigate the current political atmosphere. Regulatory movements in regions like the UK, Hong Kong, and India reflect a growing focus on HR spending and human rights protection. Despite fragmented regulations, each market presents unique nuances that shape corporate engagement strategies.

Josh: What’s your approach when you have to push the message of why it matters? Hopefully, it’s easier now than it was three years ago, but it still seems like depending on who you’re talking to, you have to emphasize why it matters. Even with some of the current challenges, where it could become criminal to use information in certain states or certain politicians want to restrict its use because they don’t see it as financially material. How do you approach that argument or the message of why it matters why we need more of this, and why some of this should be required to be reported for consistent data from every company?

Kim: Well, from my perspective, I think our initiatives definitely have a ripple effect. When we share our strategies and successes, it often sparks interest and inspires others to take action. The global landscape is shifting, and companies worldwide recognize the value of diversity, equity, and inclusion in driving business performance and fostering a positive work culture. While the specific approaches may vary based on regional nuances and priorities, the overarching goal remains consistent: to create more inclusive and equitable workplaces. As organizations witness the tangible benefits of prioritizing DEI, there’s a growing momentum toward implementing similar initiatives, regardless of regulatory pressures or political climates. Ultimately, it’s about continuous improvement and striving to be better corporate citizens on a global scale.

Maria: How much does what you’re doing in other parts of the world help drive improvements in other areas? There’s ambition to be the best we can be on a global scale. So does it have a little bit of that contagion effect, at least on the ground? Is there some competitive desire to be great in this way?

Kim: There’s undeniable synergy between regions, driven by a shared understanding of the business case and the need for progressive HR policies. My previous teams, regardless of regulatory landscapes, were motivated by the success stories of other global companies, emphasizing the importance of a cohesive workforce for competitiveness and resilience.

Josh: I recently came across an interview with Jamie Dimon, the CEO of J.P. Morgan, the world’s largest bank. He started by describing himself as a “full-throated, red-blooded, patriotic, un-woke capitalist CEO.” Despite this, he emphasized the importance of diversity, equity, and inclusion (DEI) at J.P. Morgan, highlighting their journey from initially undertaking DEI initiatives without much thought to now being more deliberate about their purpose and benefits. Many companies are just beginning to engage their employees in conversations about their experiences and gathering data, particularly in the U.S.

The sentiment is echoed across various industries, with companies viewing DEI as a competitive advantage. For instance, BNY Mellon shared how their commitment to pay equity studies and transparency in disclosing their numbers positions them favorably in attracting and retaining talent. 

Rekha: Yeah. Companies that have deeply integrated the understanding of the financial value of diversity and inclusion can articulate how it enriches their talent pipelines, enhances employee retention by fostering a sense of value, and prioritizes inclusion to leverage diverse perspectives. These companies effortlessly communicate the significance of DEI as a driver of value creation, reflecting a genuine commitment beyond surface-level actions.

Maria: How do we start to distinguish DEI from human capital management and has that changed the approach to the global strategy?

Kim: I think you’re touching on a crucial point. When we look at sustainability or ESG, it’s this vast umbrella term that encompasses various factors, each with its own nuances and complexities. Similar to traditional financial metrics, not all elements carry equal weight, and it’s essential to distill them down to what truly matters, what’s materially impactful.

With DEI, we encounter a similar challenge. There’s this understandable hesitation, especially among first-time leaders, about navigating discussions around race, gender, and equity. It’s a realm that demands education and sensitivity. However, beyond these concerns, there’s a rich landscape of inclusion and equity discussions that are fundamental to shaping organizational culture and valuing employees.

Perhaps there’s a need to streamline the conversation, to focus on the core elements that truly drive meaningful change. By disentangling the various components, we can address them more effectively and foster environments where diversity, equity, and inclusion thrive.

Kim: With sustainability or ESG, it encompasses many factors. Some say, “that’s so ESG or that’s not ESG,” but it’s not all relevant. We distill it down to key factors and test for materiality. DEI suffers similarly. Many are cautious, especially about discussions on race and gender. Equity is a significant topic, but inclusion is synonymous with culture and valuing employees. Disentangling these issues can be difficult but may help focus on core elements.

Maria: Terms like ESG can become interchanged, so precision in discussions is key. Disentanglement may facilitate more open dialogue.

Rekha: DEI can be so politicized. DEI and HCM are so intertwined; sometimes they’re one and the same, it’s almost like using different language is the main way to distinguish between them. 

Josh: Companies struggle with how to report, what to call it, and where to report it. But for companies like Kim, there’s an opportunity to harness this information and identify opportunities and risks. Large asset managers and other organizations are pushing for change. Engagement processes, direct conversations, shareholder proposals, and coalitions with trillions in assets are driving companies to publish EEO-1 data and enhance board diversity. 

Where do you see this heading, and what other avenues are investors exploring to drive progress?

Rekha: As largely a passive investor, our impact on portfolio value comes from engagement and proxy voting across 10,000 securities globally. We maintain hard lines on diversity, advocating for gender and ethnic representation, especially in the U.S. Our proxy voting reflects these positions, leveraging our substantial investment position for portfolio value. While there’s a shift in shareholder proposals, we explore avenues like engagement and scrutinizing directors’ responsibilities to mitigate risks. Moving disclosure forward is crucial for assessing portfolio dynamics and identifying growth opportunities for our beneficiaries.

Maria: Beyond data access, transparency allows for deeper insights into organizational dynamics and potential vulnerabilities. 

Do we have any other thoughts about how company data and transparency improve risk management other than just having more data per see?

Rekha: For us, as universal owners, our approach involves managing risks across a diverse portfolio. Access to comprehensive company data enables us to assess risks effectively and identify areas for investment. Transparency and data collation by providers equip us with the necessary tools to evaluate portfolio dynamics and address potential risks. It’s a crucial aspect of our risk management strategy and underscores the importance of transparency in decision-making processes.

Maria: I believe having more data about company peers and sharing that with companies can be highly effective in driving better outcomes. Understanding the practices of peers in different markets can inform engagement strategies and promote transparency within industries. It’s a valuable aspect of the engagement process that can contribute to broader industry improvements.

Josh: Certainly, companies now have much better insight into their peers or best-in-class companies. We’ve spoken with a fast-growing tech company aspiring to join the S&P 500. They look to successful tech giants with great cultures, drawing inspiration even from companies outside their industry known for their excellent workplace environments. Understanding employee priorities through engagement surveys and analyzing pipeline dynamics, retention rates, and supply chain risks with data allows for identifying internal opportunities and risks efficiently. As investors, having comprehensive data helps identify potential areas for improvement and risks. The complexity of the current data landscape presents significant opportunities for those adept at harnessing and interpreting it to inform decision-making and drive positive change within companies.

Maria: There’s a lot of untangling and entwining – it’s a tangled web. 

Josh: It’s frustrating to witness companies like Silicon Valley Bank or struggling firms like Boeing being blamed for their focus on DEI when things go wrong. There’s a tendency to attribute failures to DEI efforts, which is exasperating. But this pattern echoes the broader challenges seen in ESG evaluations. Take Boeing, for instance. Nobody really understands what’s happening there, but the question remains: Could better data have flagged risks or cultural shifts before they escalated? That’s the essence of leveraging information – identifying warning signs in company operations or culture shifts. For instance, examining governance structures like Elon Musk’s situation at Tesla underscores the importance of scrutinizing corporate governance. Musk’s actions and influence raise questions about board dynamics and governance effectiveness, illustrating the relevance of such data in decision-making processes.

Kim: Josh, regarding the SEC’s contemplation of human capital metrics, where do you foresee this initiative heading? Do you believe it’s essential for progress in the US, or will enhanced data and shareholder proposals suffice to drive improvement independently of regulatory mandates?

Josh: Predicting the SEC’s trajectory is challenging. Originally slated for release by the end of 2022, the proposed human capital rules faced delays until late 2023, with a tentative finalization set for April 2024. However, an election year may further postpone these regulations due to potential challenges and reversals. Nonetheless, insights into workforce breakdowns, such as full-time versus part-time, hourly versus salaried, and permanent versus temporary, are pivotal. Understanding how companies manage these aspects, like Costco’s emphasis on full-time employment and internal promotion, versus other retailers focused on short-term, young talent, is crucial. Additionally, comprehending the true costs of maintaining and training employees, alongside turnover rates—both voluntary and involuntary—provides essential benchmarks for evaluating companies.

Kim: Right, and by level as well.

Josh: Exactly, and mandating everything might not be feasible, especially across sectors where it could pose challenges for smaller or globally operating companies. However, certain metrics like turnover rates and demographic breakdowns are essential. In the U.S., companies are increasingly disclosing gender representation globally and using the EEO1 for domestic reporting. While the S&P 500 is nearing 80% voluntary disclosure, smaller firms show lower rates. Consistency in reporting methods, such as Ford’s unique approach based on union and non-union distinctions, fosters transparency and comparison. 

Forward-thinking companies prioritize providing insights into their workforce management philosophies and practices, moving away from proprietary concerns to meet investor expectations. The evolution of reporting norms reflects shifting investor demands and regulatory trends, aligning with global standards, albeit at varying paces and levels of voluntariness.

Maria: To wrap things up – what are your reflections on the past year and what this all means for DEI and HCM?

Kim: The backlash today is creating an opportunity for improvement in the long run. In a decade, we may reflect on this period as one where companies like DiversIQ emerged to enhance our practices. Collaborations among investors like CalSTRS, Franklin Templeton, and CalPERS drive industry standards forward. Embracing criticism and identifying areas for improvement propel us toward progress. As Josh mentioned, the abundance of data today, even in the U.S., is remarkable compared to five years ago. This optimism for the future remains strong, regardless of SEC or regulatory actions.

Rekha: The baseline for data has shifted upwards, sparking a significant demand for information. As we acquire more data, it naturally leads to more inquiries and the need for deeper insights. This trend has been unfolding for several years and shows no signs of slowing down. Moving forward, we anticipate delving into more nuanced questions and uncovering additional layers of understanding.

Maria: It forces us to be more precise. It means we have to say what we mean and mean what we say. 

Josh: Large investors have played a significant role in driving progress. For instance, organizations like As You Sow have been instrumental in prompting companies to disclose hiring, promotion, and turnover rates by gender and race, influencing over 40 companies, including Nike, in recent years. This sets a precedent for reporting standards and expectations. Interestingly, some companies internally measure performance using such data, even tying it to compensation structures, yet they hesitate to share this information publicly with stakeholders.

Maria: I’m cognizant of the time and think we should wrap up. I want to express my gratitude for the valuable work DiversIQ has undertaken to educate our members at USF, including myself. I deeply appreciate the leadership shown by Kim and Rekha and their willingness to engage with us. At US SIF, we aim to prioritize SSUs this year, ensuring they receive the attention they deserve. Thank you to everyone who joined today’s discussion. For any unanswered questions, please feel free to reach out. We have a panel of experts here eager to continue the dialogue. Once again, thank you to DiversIQ for facilitating this conversation, and special thanks to Rekha and Kim for their participation. Your insights are invaluable.

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