Tejal Patel, corporate governance director with the SOC Investment Group, explains how the group came to file groundbreaking racial equity audit proposals this year and how governance plays a role in tackling issues of diversity and inclusion
We felt we had to do something more than just ask for additional directors on the board or better disclosure
SOC (then CtW Investment Group, working alongside the Service Employees International Union) filed several novel racial equity audit proposals this past proxy season. Why did you look to financial services firms and why was the idea of conducting an audit important?
After the events of June 2020 we were trying to figure out how we could move the issue of racial justice and inequality in the shareholder space. A lot of companies had come out with statements supporting Black Lives Matter, talking about how they were very interested in addressing racial inequality, and quite a large sum of money was attached to that.
We started looking at some of these companies and one thing that stood out was the financial industry. At the end of the day, banks are the gatekeepers of generational wealth creation. They allow you to buy a house by getting a mortgage, for example, open a checking account, open a savings account, build credit in a lot of ways. Things like that are important for day-to-day life, obviously, but they also help build generational wealth, which is one of the reasons I think systemic inequality has lasted for such a long time.
We’ve been trying as investors to bring up issues of inequality for quite some time. It often wasn’t received in the same way that it was in the past year, so we would file proposals more toward board diversity, for example, or [Equal Employment Opportunity 1] disclosures and things like that.
After we saw the racial justice protests and the disparate impact that Covid-19 has had on communities of color, we felt we had to do something more than just ask for additional directors on the board or better disclosure.
The proposals didn’t receive majority votes but did secure ‘significant’ levels of support. What did you make of the response from investors?
We were very pleased with the vote results. On average, new proposals usually get [support] somewhere in the single digits. It takes quite some time to acclimate the investor space with the idea of doing something new, especially when that involves asking an outside third party to look into your financial products, for example.
We were really pleased to see there was widespread support and also an increase in support levels. At the first meeting, [the proposal] got 26.5 percent. By the last meeting I think it got well into the 40s. I think this was indicative of a paradigm shift that’s going on. Social issues, particularly issues of inequality and discrimination, were something we tried to raise in our engagement but they were often seen as outside the purview of our discussions or we didn’t have the hard data in the same way as [there is for] some of the environmental issues.
We were really pleased to see there was widespread support and also an increase in support levels
What we’ve seen in the last year is a shift in mindset and we’re also seeing a growing body of work and statistical evidence on the racial wealth gap and the disproportionate effect Covid-19 has had on communities of color, for example. That has drawn investors into supporting what was a very new idea and took a lot of legwork and outreach to explain. Did the responses of companies change as your engagement progressed?
We had different levels of engagement. In some instances, we had numerous conversations and I think they were fruitful [but] we just couldn’t see eye to eye. The Investment Group was very firm about making sure it was a third-party, independent audit and that there was a public report, and we couldn’t get on the same page. At least some of the [companies] have seen these results and are, I hope, conducting engagement with other investors.
What do you view as the link between corporate governance and social issues such as racial inequality? What is the role of the board in terms of tackling diversity, equity and inclusion (DE&I) issues?
There are two components. A lot of companies signed up to the Business Roundtable’s stakeholder-focus statement, and when you commit to addressing all stakeholders and their needs, you have to be prepared to do that, particularly in a time period when there is this heightened focus.
Your role as a director is to make sure you are adhering to these commitments… and also adhering to commitments you made [on] various issues that have arisen, be that racial inequality, sexual harassment, employee concerns about workplace safety, that sort of thing.
The other component of this – at least from the audit perspective and I think it applies to other DE&I proposals – is that [ultimately] these are risk mitigation mechanisms. The hope is that the board is able to identify what might be a potential reputational risk and address it so that hopefully it won’t blow back later. We have seen that when you don’t provide the requisite amount of oversight of what might be considered to be a purely social issue, it can cause real problems.
The hope is that the board is able to identify what might be a potential reputational risk and address it so that hopefully it won’t blow back later
Do governance issues – such as board structure – feature in your engagement around DE&I issues?
Yes. In our engagements we’re asking about how the board is overseeing, for example, the racial equity commitments it has made in response to the George Floyd protests. We’re also asking boards which committees are assigned to [that], what the structure is in terms of the chief diversity and inclusion officer vis-à-vis the CEO and the board and who they are reporting to, that kind of thing. We may further ask compensation-related issues, [such as] are there any metrics looking at this sort of thing? How do those metrics trickle down? Are they only for named executive officers?
Governance issues feature heavily. This is mainly what it’s about as an investor issue. We want to make sure the board is providing the requisite amount of oversight of issues that could cause serious reputational harm to the company.
Will you be filing racial equity audit proposals for next proxy season?
Yes. We are very likely to refile at the banks. We’re considering filing at a couple of other companies. From what I have seen, we can also anticipate this proposal being filed at other companies by other shareholders. Companies outside of financial services should probably start paying attention to it.
