Shareholders target ‘white man’s world’ with record demands for diversity data

U.S. companies are coming under intense pressure to diversify their executive ranks, with shareholders more than doubling their formal demands for audits and increased scrutiny on hiring and promotions.

But even as the Derek Chauvin murder trial grips the nation and race rises to the top of the social and legislative agenda, some executives who publicly praise the power of workforce diversity are pushing back against efforts to make their own hiring more transparent.

Amazon, JPMorgan, Johnson & Johnson and other household-name companies are fighting shareholder proposals to put diversity questions up for a vote. An effort by Nasdaq to require diversity reporting has been mired at the Securities and Exchange Commission. And activist investors, unable to shine a light on corporate hiring, are relying on algorithms to suss out which boards meet their metrics for racial, ethnic and gender diversity.

“It’s still a white man's world at the top,” said Michael Passoff, CEO of Proxy Impact, a shareholder advocacy group that tracks resolutions on environmental, social and governance issues. “Companies came out making statements in support of racial justice, and now shareholders are going to hold them to it.”

Just half the companies in the S&P 500 index reported anything about corporate board diversity in 2020, according to proxy advisory firm Glass Lewis. And while gender diversity is rising, only 22 percent of board members are women. While their ranks are growing, minorities make up less than 19 percent of board members in any given sector, according to ISS ESG, the responsible investing arm of proxy adviser Institutional Shareholder Services.

This year, shareholders have filed 69 proposals asking companies to disclose the diversity of their workforce and information on retention and promotions, twice the number filed last year, according to a report from As You Sow, Proxy Impact and the Sustainable Investments Institute.

An additional 30 resolutions target corporate board diversity specifically. And a new campaign led by the labor-affiliated CtW Investment Group has prompted 19 proposals asking companies and major banks to audit racism’s affect on their businesses.

Investors want Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, J&J and Amazon to conduct racial equity audits to ensure they can fulfill promises made last year in the wake of George Floyd’s murder and the Black Lives Matter protests that followed.

“We’re no longer debating the issue of whether or not diversity adds value to a company,” said Aeisha Mastagni, a portfolio manager at CalSTRS, which manages a $289 billion retirement fund for California state educators, and co-chairs the Human Capital Management Coalition of investors. “There’s so much evidence and academic studies that show diversity adds value that we’ve gotten past that debate and gotten to what companies are trying to do to move the needle.”

Some, including Starbucks, Facebook and AirBnB, have already commissioned racial equity audits.

BlackRock, the world’s largest asset manager, and Morgan Stanley in recent days said they would also undergo independent racial audits of their operations. CtW had filed a shareholder resolution at Morgan Stanley, and Service Employees International Union had submitted one at BlackRock.

BlackRock’s goal is “to be a leader in integrating diversity, equity and inclusion into every aspect of our business,” the company's management wrote in a memo to staff on Thursday.

But others are balking. Citigroup, JPMorgan Chase, Johnson & Johnson and Amazon have asked the SEC to block shareholder votes on the proposals, saying they are already taking steps to address racial justice. With the exception of Amazon, where a decision is pending, the SEC has sided with investors in each case, meaning the proposals will go to a vote unless shareholders can reach deals with the companies.

Chevron told the SEC that a racial equity audit would undermine its defense in lawsuits filed by cities and states seeking compensation for oil companies’ contributions to climate change and the health impacts of pollution on communities of color. The SEC sided with Chevron.

IBM in December asked the SEC to withdraw a proposal that it audit the company’s diversity, equity and inclusion efforts. The company has since reversed course and recommended that shareholders vote for the proposal at its annual meeting April 27.

“We’re glad they started the process of identifying discriminatory policies, but if you don’t have an independent person looking at this from the outside, you could miss something,” said Tejal Patel, director of corporate governance at CtW. “We’re really interested in looking at how effective the commitments they’ve made on racial justice are.”

Yet even as more companies recognize the value of diversity, their Republican allies in Congress are putting them on notice. On Monday, Senate Minority Leader Mitch McConnell warned of "serious consequences" if corporate America continues acting like "a woke parallel government."

JPMorgan, which has a record of discriminatory lending, in October committed $30 billion to diversity over the next five years, promising more mortgages for Black and Latino homebuyers, financing for affordable rentals, new bank branches in underserved communities and recruiting from historically Black colleges and universities.

JPMorgan spokesperson Michael Fusco declined to comment on the shareholder diversity resolution. The company told the SEC that it's “committed to fostering inclusive and diverse environments” in its own ranks and the communities it serves.

Citigroup, which also has paid fines for discriminatory lending, made a similar case to the SEC. In September it pledged to spend $1 billion to expand banking in communities of color and support Black-owned businesses. The company has two Black directors and one Latino on its 16-member board.

Citi spokesperson Dana Fanelli declined to answer questions and referred POLITICO to the company's proxy statement, where the board recommends that shareholders vote against the racial equity audit proposal. The company said it disagrees with the shareholder approach but is “completely aligned” with its goal of addressing racial inequity.

Amazon, too, is fighting shareholder requests for a racial equity audit and a proposal aimed at diversifying the company’s hiring pool, saying it already is implementing them on its own. The retail giant in June donated $27 million to groups fighting systemic racism and is boosting recruitment and retention of Black, Latino and Native American workers.

An effort launched by New York City Comptroller Scott Stringer in July has had some success. Stringer, who oversees a $195 billion pension fund, wants companies to disclose standardized data on their workforce demographics, information already collected as part of the federal Employment Information Report, or EEO-1, a survey that includes workforce data on race, gender and ethnicity in 10 job categories, including senior management.

Investor advocates say EEO-1s provide the best data available because it allows them to compare companies.

Before the Stringer initiative, about 31 public companies made their EEO-1 reports public. Now more than 52 have signed on, including Home Depot and Walmart.

While shareholders make their case in advance of corporate annual meeting season in the spring, lawmakers, regulators and others are joining the fight.

Rep. Gregory Meeks (N.Y.) and Sen. Bob Menendez (N.J.), both Democrats, have reintroduced legislation, H.R. 1277 (117), to force companies to disclose the ethnic, gender and veteran diversity of their boards and executive ranks. A similar measure won 55 Republican votes in the House last year, where it passed, and Meeks said he is confident the bill can clear the Senate this year.

Trade groups whose members are fighting individual shareholder proposals on diversity have endorsed the Meeks-Menendez bill, including the U.S. Chamber of Commerce, American Bankers Association, and the Securities Industry and Financial Markets Association.

“Here’s what we’re saying to corporate America in the backdrop of Floyd’s death and the increased focus on racial justice and voting rights: Talking about it is not enough,” Meeks said in an interview. “You should be jumping on board with diversity because it’s not only the right thing to do, it’s a good business thing to do.”

Businesses themselves adopted a number of diversity initiatives even before 2020’s Black Lives Matter protests. Goldman Sachs CEO David Solomon in January 2020 said the bank would no longer work on initial public offerings unless a company had at least one diverse director. In September, Silicon Valley executives unveiled “The Board Challenge,” which asks companies to appoint a Black director within a year — an initiative joined by both Nasdaq and the New York Stock Exchange.

But as shareholders attempt to hold companies to these and other high-profile public pronouncements, they’re hitting roadblocks. The subject of race is so politically and socially fraught that even companies that support diverse workforces loathe to talk about what’s happening in their ranks.

“I’ve had companies tell me that they know they have diverse directors but they’re so sensitive about asking their director to disclose their backgrounds that they don’t disclose,” said John Hoeppner, head of U.S. stewardship at Legal & General Investment Management America, a firm with $241 billion under management.

With companies unwilling to provide diversity data, investors are forced to draw their own conclusions. Some hire proxy advisory consultants that use algorithms to scan the names and photographs of executives and board members to come up with a diversity score.

“They do look at the pictures. They look at your last name, they look at etymology. It’s ridiculous,” said Hoeppner, who uses a tool from Institutional Shareholder Services.

ISS, a leading proxy advisory group, generally advises investors to vote in favor of corporate efforts to diversify. ISS spokesperson Subodh Mishra declined to comment or answer questions about the firm’s algorithm.

Hoeppner said the ISS algorithm, specifically a field called “assessed ethnic diversity,” is willing to guess directors’ ethnicity if it is not disclosed.

And it almost never is disclosed. In August, LGIM sent letters to 44 companies in the S&P 500 whose boards appeared to show a total lack of ethnic diversity.

“We said, ‘We’re using this data. If you believe the data is incorrect, let us know,’” Hoeppner said. “Only one in the U.S. pushed back and said the data is wrong.”

But only half of the companies LGIM queried responded to its letter.

Even the SEC can’t get information. In 2018, the agency surveyed 1,367 regulated entities on their gender and racial and ethnic diversity. It received 69 responses representing just 5 percent of the firms and companies surveyed.

The SEC is considering rules that would require public companies to make disclosures on diversity but there’s no date for when the regulator might act.

In December, Nasdaq told the SEC that it wanted to require companies listed on its exchange to have at least two board directors who self-identify as diverse: one female and one non-white or LGBTQ+. Companies that didn’t provide the information would be required to explain why.

The backlash has been fierce. The proposal has generated more than 200 comments to the SEC. The Senate Banking Committee’s leading Republican, Pat Toomey of Pennsylvania, and Republican Senators Richard Shelby of Alabama, Mike Crapo of Indiana, Jerry Moran of Kansas and John Neely Kennedy of Louisiana blasted the idea as a diversity “quota,” a characterization the exchange called a “common misperception.”

“We have a long way to go,” Hoeppner said. “It’s going to take years to make substantial progress.”