Wall Street is taking the call to increase corporate diversity seriously. At last.
For the first time ever, every company listed on the S&P 500 has at least one racially or ethnically diverse director. About 11% of S&P boards were non-diverse in 2020.
And now, the single most important attribute being prioritized in corporate board director searches is racial and ethnic diversity according to PwC’s 2021 Annual Corporate Directors Survey. The numbers back that up. Half (51%) of all current directors support tying executive compensation to diversity and inclusion goals, a 13 point jump from last year, according to PwC’s 2021 Annual Corporate Directors Survey.
Good thing those numbers are finally rising, because today also marks an important deadline for all Nasdaq-listed companies: They must fill out a board diversity matrix that includes the total number of company board members and how those board members self-identify regarding gender, race, ethnicity and LGBTQ+ status. The results will be made public through annual meeting proxy statements or on company websites.
Starting in August 2023, companies trading on the exchange must have at least two diverse board members or explain why they are not meeting this diversity objective.
“Because what we measure signals what we value, the stock exchange is sending a huge message on its priorities,” wrote S. Mitra Kalita, the founder and CEO of URL Media and a former CNN executive in a recent op-ed on the importance of board diversity.
“Disclosing this information to investors empowers shareholders to support companies that embody their ideals and pull investments from those that don’t,” said Representative Carolyn Maloney, a Democrat from New York who chairs the House Committee on Oversight and Reform, in a statement praising the move. “Beyond making moral and common sense, increased diversity also makes financial sense. Studies have repeatedly found that companies with more diverse leadership are better positioned to succeed.”
The 2020 murder of George Floyd by Minneapolis police that ignited Black Lives Matter protests around the country also increased demands for corporate action around diversity and inclusion, said Fassil Michael, head of thought leadership at ISS Governance Solutions.
Those demands are being taken seriously, the numbers show. But the numbers don’t show everything.
Although 19% of the total US population identifies as Hispanic or Latino, directors in that group make up just 5% of S&P 500 board seats, for instance.
“Many boards still do not reflect the diversity of their customer base or the demographics of the broader society in which they operate,” wrote Michael. “While there is cause to celebrate the progress that has been made in recent years, many companies are expected to grapple with board diversity issues — along with C-suite diversity, workforce equity and fair pay — for the foreseeable future, as the long-term trajectory of many corporate diversity and inclusion initiatives has yet to be seen.”
It’s not just about boards. New research by McKinsey found that about 75% of all Black and Hispanic employees work frontline jobs like waiting tables, stocking store shelves, or folding clothes, compared with 58% of white workers. And while three out of four of those workers want to be promoted, only one out of four will be. Black workers make up 17% of hourly jobs at major companies, but just 9% of jobs in low-level supervisory roles, one rung up the ladder.
In addition, frontline hourly employees are nearly 20% less likely than corporate employees to believe that diversity and inclusivity policies make a difference, according to McKinsey.
Big corporations have enthusiastically embraced ESG incentives recently, wrote Alison Taylor, a professor at NYU’s Stern School of Business and executive director of its Ethical Systems program, and Brian Harward, the program’s lead research scientist.
But a lot of what they’re doing “appears to be a self-serving strategy to generate positive PR,” they wrote in a joint statement. The current state of diversity efforts by corporations is “disappointing but understandable … Investors pressurize them into what amounts to a box-ticking, virtue-signaling exercise — and it shows.”
Take McDonald’s, for example. The company announced last year that it would tie 15% of executive compensation to accomplishing annual increases in the share of women and minorities in senior leadership.
Sounds great. But at the same time, McDonald’s was accused of mistreating and “redlining” its Black franchise owners, pushing them to the least favorable locations that required expensive and unrealistic renovations, and instituting harsher grading and inspections on their shops.
“What encouraged that behavior?” ask Taylor and Harward. “Was there any relationship between the lack of diversity in senior leadership and this litigation? More broadly, why should executives be given bonuses for meeting intrinsic goals that ought to be central to any company’s values and mission?”
The company has denied wrongdoing and settled claims that it had treated Black franchisees less favorably.
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