Shareholders are pushing companies to make good on diversity promises

The year 2021 is shaping up to set records for diversity proposals at U.S. companies’ annual meetings.

Nine in 10 investors backed a call last month for International Business Machines Corp. to produce an annual diversity report. Five other companies, including renewable energy firm First Solar Inc. and chemical giant DuPont de Nemours Inc., saw more than 80% of shareholders backing diversity proposals.

A year after the death of George Floyd galvanized protests against racial injustice, the same cultural pressures that prompted hundreds of the largest companies to pledge changes in their business operations to support racial equity are now fueling an unprecedented number of boardroom proposals designed to ensure they keep their word.

“We’re seeing a shift in investor sentiment” said Kristin Hull, founder of Nia Impact Capital, an investment fund that initially filed the IBM proposal. The decision at IBM was a result of many conversations, she said. Having that agreement in hand with a larger company such as IBM, which is seen as progressive, makes it easier to persuade other companies to take initiatives more seriously, Hull said.

Shareholders submitted a record 37 diversity-related proposals, and they got an average 43% of support as of Friday, according to Bloomberg Intelligence. Two proposals at Union Pacific Corp. each garnered more than 80% of shareholder support, while one at American Express Co. got 60%. The ratio may shift even more during the remainder of the so-called proxy season, when public companies face additional shareholder votes in the coming months.

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Corporate efforts on diversity had until June 2020 been focused mostly on gender. Now the pressure has ratcheted up on companies to racially diversify their workforces — from the C-suite to rank-and-file workers. Asset management giants BlackRock Inc. and Vanguard Group Inc. last year said they would vote against corporate directors who fail to act. Leading proxy-advisory firm Institutional Shareholder Services said that next year it will recommend voting against directors of all Russell 3000 or S&P 1500 companies whose boards aren’t diverse enough.

Institutional Shareholder Services has already recommended a vote against key directors at boards without female directors — one of many initiatives that helped improve the number of women on boards, said Marc Goldstein, head of U.S. research at ISS Governance. He said Institutional Shareholder Services estimates there are about 894 boards on the Russell 3000 and 28 among the S&P 500 that still lack a diverse member. Although most of the diversity proposals are still failing to get a majority vote, when support hits 30%, corporate boards will often start to engage with investors to avoid a voting defeat.

“There’s a new sense of urgency,” Goldstein said.

Just two years ago, some companies didn’t understand they were being asked about their corporate diversity and why it was important, said Meredith Benton, founder of Whistle Stop Capital in San Francisco. Benton, a sustainable-investment advisor who has been involved in shareholder engagement for two decades and has coordinated several of this year’s diversity proposals, said many companies are scrambling to catch up.

“These conversations came fast and furious, more than any other ESG issue,” she said, citing Ulta Beauty Inc. and Capital One Financial Corp. as being more forthcoming than others. “Many companies are willing to engage, and they also understand that this is an issue that needs to be discussed at the board level.”

An early sign of shifting sentiment came last year. A diversity report proposal at network security company Fortinet Inc. received 70% approval June 19, auspicious because it’s the holiday known as Juneteenth, which marks the anniversary of a Union general’s order in 1865 that freed slaves in Texas.

IBM publicly reported diversity data in the first half of 2020 and in October told employees that it will report the information annually, the company said in a statement. This year’s report was released in April, shortly before the annual meeting, and thus there was no reason to oppose the Nia Impact proposal, IBM said. The company will release more details in 2022 after it completes the spinoff of a unit, IBM said in the statement.

Another major shift has been the number of companies willing to publicly share detailed workforce data by race and gender that they report annually to the U.S. Equal Employment Opportunity Commission. This information, known as EEO-1, is private unless it’s voluntarily disclosed. In a Bloomberg survey of S&P 100 companies in June 2020, only 25 agreed to disclose their EEO-1. By October, that number had increased to 68 companies that already had or were willing to disclose either this year or shortly thereafter. At the shareholder meetings this year, three companies got proposals to disclose their EEO-1 data. The resolutions received a majority of votes at two companies.

Racial audits emerged as a new shareholder proposal. They are an independent analysis into a company’s business model to see if, and how, it causes or perpetuates racial discrimination. Although they didn’t pass, those filed at companies including Johnson & Johnson and JPMorgan Chase & Co. got more than a third of votes. That’s high enough that companies are likely to face increased pressure to agree to future reviews. A racial audit proposal filed with BlackRock Inc. was withdrawn after it agreed to perform one.

Most companies are still resisting diversity proposals. Among the reasons why is some data cast them in an unfavorable light, said Natasha Lamb, managing partner at Arjuna Capital, which is seeking detailed pay data on median pay gaps for women and people of color from large U.S. companies. So far, only Citigroup Inc., Starbucks Corp. and five other companies have agreed to such proposals in the U.S., she said. The same disclosure is mandated in Britain.

“I think some topics are harder than others, frankly,” Lamb said, adding that a report or audit that is more general can be easier to release than specific information about pay and race that shows broad disparity.

This month, Nike Inc. asked regulators to block a shareholder proposal asking the sportswear manufacturer to publish annual reports on its diversity measures. The filer, As You Sow, a nonprofit shareholder advocacy group, said Nike has faced allegations of harassment and discrimination based on gender and race, and doesn’t provide sufficient data on how effective its diversity programs are. It also doesn’t publicly release its EEO-1 data.

Nike said that it publishes “extensive materials” about its diversity efforts on its website, that diversity was one of three focus areas for its corporate targets last year, and that it aims to have racial and ethnic minorities make up 35% of its U.S. corporate workforce by 2025.

As more of the diversity information sought in proxy votes becomes public, the next challenge will be to process all the data so that they are comparable across companies, industries and geographies, said Paul Washington, head of ESG at the Conference Board, a research group in New York. “And that’s going to take a while to digest,” he said.