Are You Ready For Some Board Diversity? Investors Encouraging the NFL’s Rooney Rule

Are You Ready For Some Board Diversity? Investors Encouraging the NFL’s Rooney Rule

This time of year, public pension funds, multiemployer funds, and other individual and institutional investors are busy submitting shareholder proposals that investors will vote on next spring at corporate annual shareholder meetings. One proposal garnering increased attention is board diversity. Investors are asking companies to take steps to increase the number of women and minorities on corporate boards of directors.

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Most investors advocating for board diversity are working through coalitions. The Midwest Diversity Initiative, comprised of regional institutional investors (including Segal Marco), is reaching out to regional companies. The 30% Coalition – a group comprised of 90 members, including institutional investors with $3.2 trillion in assets under management – is tracking proposals to upwards of 50 companies.

The New York City Pension Funds sent a letter to 151 companies in September asking they provide disclosures on the race and gender composition of their boards of directors. State Street and Vanguard announced expectations that companies either increase board diversity or provide an explanation on their future plans to address board diversity. If not, the passive investment behemoths will vote out directors at the companies’ annual shareholder meetings. 

All of this momentum is a necessary ingredient for change given the challenging nature of refreshing corporate boards of directors. The average tenure for a director is six to 10 years and an enforced mandatory retirement age is rare in corporate America. When board seats become available, a typical recruitment pool provided by a professional services firm or references from sitting directors tend to skew white and male.

That’s why investors are encouraging companies to adopt the Rooney Rule. Adopted from the NFL, the Rooney Rule states the companies will include diverse nominees in every candidate pool for an open board seat. The NFL established the Rooney Rule in 2003 to require minorities be included in every recruitment pool for head coach searches. The more diverse candidates in the pipeline, the better the odds of selection. Three years after the Rooney Rule was adopted by the NFL, the percentage of African American coaches jumped from 6% to 22%.

Companies seem receptive to the diversity aims. LeanIn.Org and McKinsey & Company released a study last month on gender equality in the workplace. The study, Women in the Workplace 2017, examined 222 companies and found company commitment to gender diversity is at an all-time high for the third year in a row. The Wall Street Journal recently reported that Spencer Stuart, an executive recruitment firm, found that the number of women and minority directors on boards hit a record high in 2017. S&P 500 firms placed 397 independent directors this year and half of them were diverse.

The business case for diversity is supported by recent studies from the law firm Paul Hastings, the Peterson Institute for International Economics, Credit Suisse, McKinsey and others. However, not all studies provide a rosy picture. In May, Wharton management professor Katherine Kline examined the academic research and reported that board gender diversity has either a weak relationship with board performance or no relationship at all. Still, academic research has yet to make the business case for boards comprised solely of white males.

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