Boards are becoming more diverse and detailed disclosure provides a critical window into progress. Boards that are both diverse and inclusive offer multiple ways to look at strategy and risk and a lower likelihood of groupthink. Their selection process extends beyond the board’s immediate network and diverse boards connect companies to communities that represent large swaths of its customers, employees and/or business locations. For investors and also for researchers, the more specific the company’s disclosures, the easier it is to assess board composition compared to the demographics of key stakeholders and society at large.
Demands for disclosure: Nasdaq’s Board Diversity Rule may perhaps have the widest impact on diversity disclosure in the United States. The rule requires disclosure of the number of directors self-identified with each specified demographic group and the number self-identified with each gender and as LGBTQ+. Subsequent deadlines impose a minimum number of directors from underrepresented groups on a comply-or-explain basis.
The SEC plans to introduce a proposed rule on board diversity disclosure later this year. A number of states, including Illinois, already require board diversity reporting for public companies with headquarters in their jurisdictions. The Russell 3000 Board Diversity Disclosure Initiative, representing 26 investor organizations, also has sent letters to companies since 2020 encouraging disclosure of the race/ethnicity and gender of individual directors.
A growing board response: The good news is that boards are heeding stakeholder calls for disclosure. According to KPMG Board Leadership Center’s analysis of board diversity disclosure data provided by ESGAUGE, disclosures of racial/ethnic diversity has skyrocketed. From January 2021 to December 2022, the percentage of S&P 500 companies disclosing the board’s racial/ethnic diversity in some form increased from 34 percent to 92 percent. Among Russell 3000 companies, the percentage of companies disclosing this information increased from 12 percent to 71 percent.
More is needed: Specific disclosures vary, however, and details broken out by race/ethnicity are less common among companies not subject to the Nasdaq rule. Approximately 50 percent of Russell 3000 companies are listed on the Nasdaq; consistent with its rule, 54 percent disclose racial/ethnic categories with which directors identify (e.g., “one director/Jane Smith is Black, one director is Latina, one director is Asian, and three directors are White”). This is the most common form of disclosure among Russell 3000 companies. S&P 500 companies are not collectively showing leadership, however. The most common form of racial/ethnic diversity disclosure for these companies, at 70 percent, is less useful because it includes an aggregate number (e.g., “three directors are racially/ethnically diverse”).
Heading into the 2023 proxy season, many institutional investors have indicated their intention to vote against the nomination/governance committee chair, all incumbent nomination/governance committee members or the entire board for a lack of board diversity or relevant disclosure. Proxy advisory firms continue to tighten their voting recommendations, as well. The Thirty Percent Coalition supports these efforts. In pursuing board diversity strategies for 2023 and beyond, more detailed disclosure will be an important enabler.
Susan Angele
Board Chair, The 30 Percent Coalition