And speaking of the NYC Comptroller’s Boardroom Accountability Project, as I just did in this PubCo post on the Project’s push for proxy access, on Friday, Stringer announced the the newest phase of the Project, Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity. The third phase of the initiative calls on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller’s Office, companies would commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs are selected. The announcement claims that the Project 3.0 represents “the first time a large institutional investor has called for this structural reform for both new board directors and CEOs.” Notably, the announcement also indicates that the Comptroller’s Office will “file shareholder proposals at companies with lack of apparent racial diversity at the highest levels.” The Comptroller’s Office characterizes the new initiative as the “cornerstone” of its Boardroom Accountability Project that “seeks to make meaningful, long-lasting, and structural change in the market practice so that women and people of color are welcomed in the door and considered for every open director seat as well as for the job of CEO.” Given Stringer’s success with his proxy access campaign, companies should pay close attention.
As discussed in this PubCo post, since the inception of the Comptroller’s “Boardroom Accountability Project” in 2014, there has been a 10,000% increase in the number of companies with proxy access. Stringer began the Project with proxy access proposals submitted to 75 companies. At the time, Stringer viewed the campaign as having been “enormously successful: two-thirds of the proposals that went to a vote received majority support and 37 of the companies have agreed to enact viable bylaws to date.” (See See this PubCo post and this PubCo post.) So effective was the proxy access campaign that Stringer leveraged its success and the “powerful tool” it represented to “demand change” through the Boardroom Accountability Project 2.0, which pioneered the “Board Matrix” method for disclosing details about company board directors. Now, five years later, the number of companies with “meaningful” proxy access has climbed from just six in 2014 to over 600—including over 71% of the S&P 500—all as a consequence, Stringer contends, of the Boardroom Accountability Project.
To launch Project 3.0, Stringer sent a letter to 56 companies in the S&P 500 that do not currently have a Rooney Rule policy requesting that they adopt one. The policy would require the initial pool of candidates from which management-supported board and CEO candidates are chosen include qualified female and racially/ethnically diverse candidates and that “director searches include candidates from non-traditional environments such as government, academic or non-profit organizations in order to broaden the pool of candidates considered.” According to the letter, the Rooney Rule does not “dictate who should be hired and does not mandate an outcome. It does however, widen the talent pool and require the inclusion of a diverse set of candidates for consideration.”
Broadening the search to include non-traditional candidates with careers outside of the C-suite that have not previously served on public company boards was designed to help diversify the talent pool. The Comptroller’s Office believes that “too often the board nomination process remains insular and that lack of board quality and diversity can be traced to a board’s failure to cast a wide net when looking for new members. According to PwC’s 2016 Annual Corporate Directors Survey, 87% of directors said they rely on board member recommendations to recruit new directors.” And some boards have policies or practices that favor candidates with prior executive experience. Given that, even in 2017, about 72% of Fortune 500 CEOs were white and male, those types of policies can certainly have the effect of narrowing the candidate pool, often leaving no diverse choice or selection from a small pool of established, but “often ‘overboarded’ minority business leaders.” However, according to a 2016 study in the Harvard Business Review, “the odds of hiring a woman were 79 times greater when there were at least two women in the finalist pool, and the odds of hiring a minority were a staggering 193 times greater when there were at least two minority candidates in the finalist pool.”
Although there has certainly been a recent focus on achieving more corporate diversity by companies and institutional shareholders (and even governments, as in California’s board gender diversity law—see this PubCo post), nevertheless, progress has been slow and substantial disparity in numbers persists. The Comptroller’s Office observes that, “as of 2018, 66 percent of board members at Fortune 500 companies were white men. Another 17.9 percent were white women, followed by 11.5 percent men of color and 4.6 percent women of color. When it comes to executive leadership, as of May 2019, 6.6% percent of Fortune 500 CEOs are women, and there are similarly low numbers of people of color leading those companies.”
According to Stringer, the Office is embarking on 3.0 “not just because it’s the right thing to do—we’re doing it because it’s the smart thing to do.” To that end, the letter from the Comptroller’s Office cites studies and other evidence indicating a “positive correlation between board diversity and performance,” including research by McKinsey that correlates greater gender and ethnic board diversity with stronger financial performance and research by MSCI suggesting that “gender diverse boards have fewer instances of bribery, corruption, and fraud. Diverse boards can better manage risk by avoiding ‘groupthink,’ challenging assumptions, and cultivating creative solutions.” The IMF has attributed its own failure, in part, to correctly identify the risks leading to the financial crisis to a “high degree of groupthink.”