Investors Speak: Diversity Matters

It’s no secret that environmental, social, and governance (ESG) issues are at the forefront of the national conversation surrounding social equity today.  Recently-published research also identifies these non-financial factors as important considerations in investment decisions.  The survey, conducted by Ernst & Young (EY) (the Survey), analyzed responses from governance specialists from more than 60 institutional investors representing more than $38 trillion in combined assets under management regarding investment priorities on questions ranging from company strategy to investment priorities.  Not surprisingly, the results of the Survey demonstrate the continued importance of diversity, equity and inclusion (DE&I) initiatives.

Success Drivers & Investment Engagement

The Survey asked investors to identify “three biggest drivers of strategic success in the next three to five years will be.”  In response, 42% of investors identified diversity of board, management and workforce as a key success driver.  The Survey noted that investors view diversity as “central to a company’s ability to innovate and embrace change” and recognize “diversity’s link to performance, profitability and innovation,” as well as how the “business case intersects with the broader social movement around racial justice.”  Investors specifically identified the “opportunity cost” when companies are not leading on social change or responding to the national conversation on race: “the impact on the company’s relationships with employees, customers and other stakeholders.”

Similarly, when asked what engagement topics investors will prioritize this year, workforce and board diversity was among the most cited themes with approximately 2/3 of surveyed investors intending to push for robust workforce and boardroom diversity disclosures.  Investors believe that, at a minimum, workforce disclosures should align with the disclosure framework of the U.S. Equal Employment Opportunity Commission’s EEO-1 Survey.  Some of these investors also intend to push for supplemental data that would better reflect how the company is run, with a few also seeking promotion, retention and recruitment data for protected classes of employees to directly illustrate the upward mobility of diverse talent.  Investors, however, believe such data “must be supported by a narrative about the company’s human capital strategy and goals,” which should include not only racial diversity, but also diversity in age and demographics.

At the board level, investors are also seeking disclosures of the board’s diversity across gender, race and ethnicity as well as implementation of policies that encourage diverse director recruitment.  In fact, investors stated they may vote against certain directors not disclosing this demographic information and those failing to make progress related to these diversity priorities.

Disclosures & Effectiveness

According to the Survey, investors are interested in more robust human capital disclosures, with 85% of investors stating they wanted increased disclosures surrounding workforce diversity in terms of gender, race and ethnicity.  The Survey pointed out that “[t]his finding aligns with diversity being a top investor engagement priority and an area many investors view as a top strategic value driver.”  In addition, 58% of investors responded that they wanted more pay equity disclosures, “which investors discussed as an extension of workforce diversity disclosures and a window into whether the company has structural issues around diversity, equity and inclusion (DEI) that need to be addressed.”  Specifically, investors seek median pay gap data for each defined level of the company’s workforce. 

Investors also suggested boards could strengthen their effectiveness “by diversifying across numerous dimensions, specifically including race, ethnicity, gender, skills and experiences.”  Investors believe boards should “set the tone at the top for the company’s DEI goals, and having diverse perspectives and experiences in the boardroom to stress test ideas in a crisis and more effectively oversee strategy.”

The Survey overwhelmingly makes the case for diversity in workforce and boardroom composition.  Investors not only want companies to prioritize diversity for corporate well-being, but they also plan to base their investment decisions on these issues and have asked for more robust disclosures to assist them in that regard.  Companies can, and should, oblige these requests by making diversity a priority internally, as well as publicly.

Attorneys on Ballard Spahr’s Diversity and Inclusion Counseling Team routinely advise public and private companies in a range of industries on the development, enhancement, and implementation of their DE&I programs. The Team includes attorneys in our Labor and Employment Group who advise on these issues with due regard for civil rights and non-discrimination laws.  

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