Ben Maiden looks at how some investors are pressing US companies to take racial equity issues seriously – and the responses they are getting
As thousands of people took to the streets last summer to protest the deaths of George Floyd and other black Americans at the hands of police officers – alongside the disproportionate impact of the Covid-19 pandemic on communities of color – powerful chief executives made statements of support and pledged millions of dollars in assistance.
And some investors took a fresh look at how they might hold those CEOs and their companies accountable for their promises and progress on diversity and inclusion. During this year’s proxy season, such accountability has become more tangible through shareholder proposals and votes, engagement and disclosures.
The extent of the change is stark. The Sustainable Investments Institute (Si2) reports that 28 shareholder proposals dealing with racial justice had been filed as of April 27, compared with a total of none across at least the previous nine years. The number of proposals asking firms to release EEO-1 reports, which include demographic workforce data, rose from 19 in 2020 to 52 this year (up to April 27). Proposals on general or minority pay gaps and on board diversity have dropped this year, according to data from Si2, perhaps reflecting a switch in approach.
Arguably the most important development among shareholder proposals has been the emergence of requests that companies conduct racial equity audits, ideally using a third party. Some companies have objected – but not all of them. And the proposals are gaining significant levels of investor support, even if none has secured a majority at time of writing.
The CtW Investment Group, working alongside the Service Employees International Union (SEIU), has been a prime mover with this concept. The group and the SEIU between them have filed proposals at eight major financial institutions this proxy season: Bank of America, BlackRock, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp and Wells Fargo.
Tejal Patel, corporate governance director with CtW Investment Group, describes racial equity audits as ‘a novel approach to an important societal issue’ that goes beyond the usual disclosure model for such proposals. Others on the investor side express similar views. Olivia Knight, racial justice initiative manager with As You Sow, calls the audit proposals ‘a step up’ from proposals simply seeking disclosure. ‘It’s taking a step beyond,’ agrees Marvin Owens, chief engagement officer with Impact Shares and former senior director of economic development at the NAACP.
Patel tells IR Magazine that the events of last summer inspired CtW Investment Group to refine what it was looking for from companies, and that it was inspired by Starbucks, Facebook and Airbnb having conducted similar audits. Her group looked to major financial services firms because they are both systemically important to the economy and play key roles in communities of color through their potential to help create wealth, she says.
Those companies in the past year have made statements, pledges and a lot of disclosures, Patel notes. ‘[But] what we’re trying to get at is the effectiveness of these commitments,’ she says, as well as have a holistic review. Companies need to make sure the money they are spending is going to the right places, she adds. The CtW Investment Group also wants companies to engage with stakeholders – such as employees and civil rights groups – that have insight into the relevant issues and that, for example, might be able to advise on occasions where a well-intentioned initiative could have negative unintended effects, Patel explains.
Getting to the proxy statement Bank of America is one of the few companies at time of writing to have had a racial equity proposal reach a vote at its AGM. In its proposal, the CtW Investment Group urges the board to ‘oversee a racial equity audit analyzing [Bank of America’s] adverse impacts on non-white stakeholders and communities of color.
'Input from civil rights organizations, employees and customers should be considered in determining the specific matters to be analyzed. A report on the audit… should be publicly disclosed on [Bank of America’s] website.’
In its supporting statement, CtW Investment Group says: ‘A racial equity audit will help [Bank of America] identify, prioritize, remedy and avoid adverse impacts on non-white stakeholders and communities of color. We urge [Bank of America] to assess its behavior through a racial equity lens in order to obtain a complete picture of how it contributes to, and could help dismantle, systemic racism.’
In the company’s proxy statement, the board urges shareholders to vote against the proposal, stating: ‘We believe our actions and focus in making progress on the issue of racial equality, and reporting on our progress regularly, render the proposal’s requested audit unnecessary.’ It further asserts that Bank of America is ‘committed to making certain that our policies, practices, products and programs align to advance the company’s purpose of making our customers’ financial lives better.’
Among other things, it states that ‘our board and ESG committee are actively engaged in the oversight of our ESG programs and strengthening our ESG practices to support responsible growth’ and that ‘integral to sustainable, responsible growth is sharing our success with the communities in which we operate, which we do through ESG leadership, including taking action to drive progress on racial and economic inequality in the [US].’
Lee McEntire, IR executive with Bank of America, tells IR Magazine that this proposal attracted the most investor interest during engagement this proxy season, and that investors were concerned by its ‘broadness’. The bank was also unclear what the CtW Investment Group wanted to achieve, he adds. He notes that the bank has released human capital reports in the past two years and argues that having a third party conduct an audit would be a distraction to those employees at Bank of America who are preparing such disclosures.
Ultimately, the proposal was backed by 26 percent of votes cast at the AGM, a level of support that is often cited by governance professionals as significant, particularly the first time a proposal is voted on. McEntire welcomes the level of support received by the company. Patel also welcomes the outcome, saying it demonstrates that shareholders will be asking for such actions in the future.
Johnson & Johnson received a similar proposal this year, filed by Trillium Asset Management. It requests that the company ‘conduct and publish a third-party audit… to review its corporate policies, practices, products and services, above and beyond legal and regulatory matters; to assess the racial impact of the company’s policies, practices, products and services; and to provide recommendations for improving the company’s racial impact.’
Johnson & Johnson unsuccessfully requested no-action relief from the SEC for excluding the proposal. It argues this in part on the basis that the firm ‘has substantially implemented the proposal’. For example, it writes that it already publishes information on ‘its assessment of the ways that it has been working, and is continuing to work, to promote diversity, equity and inclusion both within and outside the company, including promoting racial and social justice.’
It also provides details of its ‘You belong: diversity, equity & inclusion impact review’, which explains how Johnson & Johnson approaches such matters and how that is reflected in company policies, practices and initiatives. Among other things, it states that the impact review looks at ways the company ‘has approached products and services in order to promote racial equity.’
The proposal received the support of 34 percent of votes cast at its AGM. Susan Baker, director of shareholder advocacy at Trillium, comments: ‘This is a very high vote for a first-year issue and underscores the importance of the topic for [Johnson & Johnson]. We strongly believe it should move forward with conducting the audit.’
Johnson & Johnson did not respond to requests for comment.
Welcoming the audits Not every company receiving a racial equity audit proposal has objected, however. According to Patel, the CtW Investment Group and the SEIU withdrew their proposals from Morgan Stanley and BlackRock, respectively, after both companies agreed to third-party audits.
Similarly, IBM’s board of directors urged shareholders to support a proposal requesting that the company ‘publish annually a report assessing IBM’s diversity, equity and inclusion efforts, at reasonable expense and excluding proprietary information. The report should include: the board’s process for addressing the effectiveness of its diversity, equity and inclusion programs; and the board’s assessment of program effectiveness, as reflected in any goals, metrics and trends related to its promotion, recruitment and retention of protected classes of employees.’
IBM’s board writes in the proxy statement that directors discussed the proposal and ‘determined that it aligns with IBM’s goals of a diverse and inclusive workforce, which are regularly reviewed by the board.’ As such, the company says, in December the board adopted a policy implementing the request.
Aside from Bank of America, other companies to have received a racial equity audit proposal either did not respond to requests for comment or were unable to comment beyond their proxy statement.
Not just audits Audits are not the only form of proposals addressing racial issues on the agendas at AGMs this year. For example, Amazon’s proxy statement includes a proposal requesting that it prepare a report disclosing ‘promotion velocity rates’ at the company, defining this as ‘the time it takes from the date of hire to promotion, or between one promotion and the next. The report should provide promotion velocity rates by title and level for different gender and racial identities.’
In its proxy statement the company says: ‘We are committed to increasing gender and racial/ethnic diversity and are continuing to invest in our efforts to bring more women and employees from under-represented racial/ethnic groups into leadership positions at Amazon… Because promotion velocity can be affected by a combination of factors, including prior work experience and education, individual performance, time in role/level and job scope, the proposed analysis would be uninformative and possibly misleading.’
Abbott Laboratories shareholders voted at their AGM on a proposal requesting that the company publish a report ‘disclosing the company’s plan, if any, to promote racial justice.’ The board urged shareholders to vote against the proposal, arguing that it ‘does not accurately reflect Abbott’s commitment and work to date on racial justice, or the company’s intentions moving forward. Rather, Abbott’s current disclosures in its global sustainability report and 2030 sustainability plan depict Abbott’s robust commitment to racial justice, diversity and inclusion.’
The company adds that Abbott will publish a diversity and inclusion report and provide a consolidated EEO-1 report, making the proposal’s requested report unnecessary.
The proposal garnered support of 38 percent of the votes cast. ‘It is time for Abbott to release statistical data, to prove it is an ally in the fight to end systemic racism in corporate America,’ says Knight in a statement on the vote.
A request for comment from the company was not returned.
We need to talk The nature of engagement with companies around diversity has also shifted over the past year, investment professionals report. They say this in many cases includes an increasing willingness by issuers to hold discussions and an increased ability to take a more substantive approach.
Owens tells IR Magazine that there is ‘much more openness to talk.’ He says this began to be noticeable last summer, while he was still at the NAACP, when companies approached the civil rights group privately to ask for assistance in addressing racial equity issues.
‘When the issue is raised they get it,’ says Timothy Smith, director of ESG shareowner engagement at Boston Trust Walden, referring to the value of diversity both to companies and the economy as a whole. Unless a company has its head in the sand, it is ‘talking about [diversity] in more significant ways,’ he adds.
Most companies are aware they have to take diversity seriously, with many having recently hired diversity and inclusion officers and planning new diversity and inclusion strategies, according to Samantha Burke, ESG analyst with Boston Trust Walden. Smith adds that diversity and inclusion officers are gaining greater status within companies.
Similarly, Baker reports that companies are more willing to hear the investor’s rationale for seeking disclosures and goals around diversity. She adds that Trillium’s sector analysts recently sent a racial justice questionnaire to their buy-list companies from which the full investment team tallied a 70 percent response rate.
Desperately seeking EEO-1 Diversity disclosure is another area that has seen a rapid shift over the past year, in part through the growing number of companies releasing EEO-1 data. New York City comptroller Scott Stringer last July launched a campaign urging S&P 100 companies to disclose data from their EEO-1 reports to enable investors to measure the success of their diversity and inclusion practices across their workforces.
According to Stringer’s office, only 14 S&P 100 companies had disclosed this information before the campaign began but, as of late April, 62 companies have committed to do so as a result of the push.
Elsewhere, State Street Global Advisors (SSGA) earlier this year announced proxy voting practices intended to ensure that companies are transparent about the racial and ethnic composition of both their boards and their workforces.
According to these practices, SSGA in 2021 will vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not disclose, at minimum, the gender, racial and ethnic composition of their boards. In 2022 it will vote against the chair of the compensation committee at companies in the S&P 500 that do not disclose their EEO-1 survey responses.
‘There’s momentum building around disclosure,’ Owens says. This comes in part from investor pressure for EEO-1 data, but also from changes at the SEC around human capital management reporting, a growing sense of accountability and companies becoming more comfortable with releasing information, he adds.
Above all, investment professionals say, companies are beginning to recognize that the focus from shareholders on addressing diversity and racial equity through disclosure and action is here to stay.
