Since the onset of protests that followed the death of George Floyd on May 25, 2020, more than 35 of America’s largest corporations have put out statements condemning institutionalized racism. These statements, either implicitly or explicitly, acknowledge that a portion of the responsibility for addressing this racism lies with corporate America.[1] In the weeks and years ahead, corporate boards will be discussing these statements with their CEOs and much hard work will be required to define the appropriate scope of that responsibility and create accountability around it.
A second look at their own corporate diversity and inclusion programs may be an appropriate first step for corporate boards undertaking this journey, as enhancing access to leadership and pay equity for Black employees is generally the aspect of institutionalized racism that is most within a corporation’s control.
For many corporate boards, the results of this assessment will be cause for pause. To date, at least twenty years of pre-existing diversity and inclusion (D&I) programs across corporate America have yielded limited empirical results when it comes to Black Americans. In 2020, fewer than 1% of Fortune 500 CEOs and fewer than 9% of Fortune 500 directors is Black.[2] In addition, 26% of Fortune 100 companies do not have a single ethnic or racial minority in their C-suite.[3] The wage gap data is even worse, with the gap wider in 2019 than it was in 2000.[4] For Black women, the wage gap remains at almost 40%.[5] These programs have, in short, failed to create more Black leaders or equal pay for equal work when it comes to Black employees. And, by definition, the results indicate that most corporate D&I programs have failed to create more Black CEOs or equal pay at their own institutions.
While gap assessments are easy, productive plans for improvement are much harder. Set forth below are three opportunities for corporate boards to drive more substantial results and accountability in their corporate D&I programs.
Board Strategies to Enhance Corporate D&I Outcomes
- Formalize the Board’s Oversight of D&I. One of the simplest opportunities that boards can leverage to enhance D&I outcomes is to allocate ample time for board oversight and review of D&I within the organization. With director time at a premium and a heavy roster of pre-existing enumerated responsibilities to address, boards are hard-pressed to add significant time for unenumerated topics in the absence of a crisis, as such additions require either a reduction in time for required topics or addition of incremental meeting time, which may be difficult or expensive[6] to obtain. In fact, according to recent governance surveys, less than 38% of board governance committees addressed racial and ethnic diversity even once a year.[7] Adding clear charter requirements for D&I governance is a good way to ensure that there is adequate agenda space allocated for meaningful board review and discussion of D&I status within the organization and clear messaging to management that D&I performance is important.
- Include D&I in Strategic Planning. In addition to clear board authority, corporate boards also have an opportunity to enhance D&I results by overseeing development and implementation of a D&I strategic plan. According to CEOs and diversity experts, a board reviewed D&I plan is a critical component of driving better results and such plans should include metrics and measure progress on outcomes and behaviors.[8] In practice, however, D&I plans across corporate America are notorious for being tactical rather than strategic, short on measurement of results, and low on accountability.[9] In addition, where D&I plans do track metrics, they have often been overly general in ways that have masked the lack of real progress for Black Americans. Boards can, and should, require that D&I plans be subject to their review and should also leverage third party experts, enterprise-wide strategic planning resources and their own experience to ensure that such plans reflect clear and well-considered goals and metrics that bear a strong relationship to those goals.[10] In addition, Boards can also ensure that D&I plans include levers to create accountability throughout the organization via the use of incentive compensation, performance ratings or other measures that may be appropriate based on institutional positioning.[11]
- Meaningfully embed D&I in key executive talent and succession planning. In addition to strategic planning, corporate boards can further enhance D&I outcomes by ensuring that the talent and succession plan includes appropriate focus on diversity in the pipeline. Revenue generating lines of business and finance groups generate 90% of CEOs, who in turn, comprise approximately 70% of corporate directors. [12] However, it is well known and documented that these key groups have some of the lowest levels of diversity in leadership roles. To address this issue meaningfully, boards must begin reviewing non-executive talent pools within these key CEO-pipeline teams to ensure there is sufficient diversity in the leadership pipeline at each level, and, where such diversity is lacking, require that D&I plans are expanded to include talent development and retention programs designed to result in more diversity in this pipeline.
Conclusion
While corporate boards must rely on management and employees to execute on D&I programs within their organizations, the strategies above can enhance the board’s ability to direct and oversee such execution. Such oversight is both appropriate due to the strong correlation between diversity and corporate innovation and earnings [13] and popular with institutional shareholders, sustainability organizations and public advocacy groups, which have been increasingly vocal in their desire to see boards play an active role on ESG topics generally and D&I specifically.[14] In connection with the renewed commitment to D&I that accompanied the CEO statements issued in early June of 2020, corporate boards therefore have strong grounds, support and tools to help drive better outcomes.
Footnotes
[1] Nike’s Just Don’t Do It video, Ben and Jerry’s manifesto on institutionalized racism and Blackrock’s commitment to address racial disparities within its own organization constitute just three examples. A sampling of over 30 other corporate statements can be found in the Wall Street Journal’s recent article “What CEOs said about George Floyd’s Death” available at https://www.wsj.com/articles/what-executives-said-about-george-floyds-death-11591364538.
[2] Phil Wahba, “The number of black CEOs in the Fortune 500 remains very low,” Fortune (June 1, 2020), available at https://fortune.com/2020/06/01/black-ceos-fortune-500-2020-african-american-business-leaders/; Alliance for Board Diversity & Deloitte LLP, “Missing Pieces Report: The 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards” (Feb. 2019), available at https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/missing-pieces-fortune-500-board-diversity-study-2018.html; Subodh Mishra, Institutional Investor Services, Inc., “U.S. Board Diversity Trends in 2019,” Harvard Law School Forum on Corporate Governance (June 18, 2019), available at https://corpgov.law.harvard.edu/2019/06/18/u-s-board-diversity-trends-in-2019/.
[3] https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-82-diversity-among-f100.pdf (PDF: 512 KB).
[4] Elise Gould, Economic Policy Institute, “State of Working America Wages in 2019,” (Feb. 20, 2020), available at https://www.epi.org/publication/swa-wages-2019/.
[5] Elise Gould, Janelle Jones & Zane Mokhiber, Economic Policy Institute, “Black workers have made no progress in closing earnings gaps with white men since 2000” (Sept. 12, 2018), available at https://www.epi.org/blog/black-workers-have-made-no-progress-in-closing-earnings-gaps-with-white-men-since-2000/.
[6] Many boards pay their directors on a per meeting basis, which makes additional meetings expensive.
[7] https://www.spencerstuart.com/research-and-insight/nominating-governance-survey-2019
[8] CEO Action for Diversity and Inclusion, which represents over 1000 CEOs including many in the Fortune 50, has long advocated for Board approved strategic plans on D&I and recently issued a CEO pledge that included this commitment. https://www.ceoaction.com/pledge/ceo-pledge/. Other experts have suggested similar measures. https://fortune.com/2019/06/21/pwc-diversity-inclusion-workplace-culture/. The Chief Diversity Officer at recognized diversity leader Sodexo further commented on the importance of strategic planning and metrics as a tool for driving better outcomes on diversity in the 2007. Rohini Anand, Chief Diversity Officer, Sodexo, in Janice L. Dreachslin & Peggy D. Lee, “Applying Six Sigma and DMAIC to Diversity Initiatives,” Journal of Healthcare Management 361-67 (Chicago Vol. 52, Iss. 6, Nov./Dec. 2007).
[9] Shane Crabb, “Accountability is key to enabling diversity and inclusion in organizations”, Chief Learning Officer (Feb. 26, 2020), available at https://www.chieflearningofficer.com/2020/02/26/accountability-is-key-to-enabling-diversity-and-inclusion-in-organizations/.
[10] Metrics to consider would include pay equity, retention and turnover rates, promotion rates and development spend by key demographics including race, ethnicity, gender and religion.
[11] Institutional investors such as BlackRock, proxy advisors such as ISS and activist groups have been advocating for the inclusion of ESG performance metrics in incentive compensation for several years, and companies including Microsoft and Intel have included such metrics as a factor in named executive officer bonus calculations. Microsoft, Form DEF 14A (Oct. 16, 2019); and Intel, Form DEF 14A (Apr. 3, 2019).
[12] https://www2.deloitte.com/us/en/insights/industry/financial-services/diversity-and-inclusion-in-financial-services-leadership.html; https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-82-diversity-among-f100.pdf (PDF: 512 KB).
[13] A recent study by the Boston Consulting Group found that companies with more diverse management teams have 19% higher revenues due to innovation. Similarly, a McKinsey study found that companies in the upper quartile of management diversity were 33% more likely to have above average earnings margins than those in the lowest quartile. This correlation was even higher, at 42%, when it came to board diversity. Rodo Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, & Katie Abouzahr, Boston Consulting Group, “How Diverse Leadership Teams Boost Innovation” (Jan. 23, 2018), available at https://www.bcg.com/publications/2018/how-diverse-leadership-teams-boost-innovation.aspx; https://www.mckinsey.com/~/media/mckinsey/business%20functions/organization/our%20insights/delivering%20through%20diversity/delivering-through-diversity_full-report.ashx.
[14] The Council of Institutional Investors, which includes large institutional investors, pension funds, and asset managers in its membership, recently noted that “Many of our members have focused for some time on the need for greater racial, ethnic and gender diversity on boards and in management, and for a workplace culture that embraces equal opportunity, respect and fair treatment“, https://www.cii.org/calltoaction. Well before the activism triggered by the death of George Floyd, organizations including Blackrock, the Business Roundtable, the World Economic Forum and the NAACP had been issuing public calls for corporations to prioritize, disclose and promote enhanced diversity and inclusion within their organizations. See Larry Fink’s 2020 annual investor letter at https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter, the Business Roundtable’s August 2019 statement on redefined corporate purpose at https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans, and a January 2020 World Economic Forum Annual Meeting discussion, available at https://www.weforum.org/agenda/2020/01/diversity-inclusion-gender-accessibility-workplace-culture/.
Saema Somalya is Senior Vice President and Deputy General Counsel, Corporate for Fifth Third Bancorp and Fifth Third Bank, where she oversees corporate governance and Board of Directors programming, including Board diversity. She is a member of the Society of Corporate Governance and serves on several non-profit boards including the YWCA of Greater Cincinnati, Muslim Advocates and the Economic Center of the University of Cincinnati.
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