The push for increased diversity on corporate boards ramped up recently when Vanguard, a leader in mutual funds and asset management, released its 2019 Investment Stewardship Annual Report. The report, released on August 30, 2019, urges companies to seek new directors with a broad range of personal characteristics, including gender, race, ethnicity, national origin, and age.1
This latest push for board diversification from Vanguard follows a number of policy shifts by other investors and industry groups, particularly with respect to gender diversity. Back in August 2017, Vanguard emphasized in an open letter addressed to directors of public companies worldwide, the importance of gender diversity in driving performance. BlackRock has encouraged companies to have at least two women directors, and State Street Global Advisors has pledged to vote against the nominating committees of companies that have no women on the board and fail to demonstrate an attempt to diversify. ISS and Glass Lewis also stated that they will begin making adverse voting recommendations in the coming proxy seasons for certain companies with no women on their boards.
Government has gotten involved, as well. To much publicity, California passed a law in September 2018 requiring public companies with headquarters in the state to include a minimum number of women directors, depending on the size of their boards. On August 27, 2019, the governor of Illinois signed a bill requiring public companies headquartered there to file disclosures about the racial, ethnic, and gender diversity of their directors.
Companies have begun to emphasize the importance of diversity in board composition as well, yielding results most noticeable in the number of women appointed to public company boards. According to annual shareholder meeting voting results collected by ISS,2 women made up 45 percent of new directors in the Russell 3000 this year, compared to 34 percent in 2018, an increase that is consistent across market segments. In addition, women will likely hold 30 percent of directorships on S&P 500 company boards in the next couple of years based on the current rate of growth.
Though the number of ethnic minority directors has increased of late, the change is much less pronounced compared to the spike in women directors. In 2019, 21 percent of new directorships went to non-Caucasian nominees, up by approximately two percent from 2018. For Russell 3000 companies (excluding companies in the S&P 500), there was actually a slight decrease in the number of new non-Caucasian directors (13 percent) compared to 2018 (14 percent).
Vanguard’s expanded focus on diversity seeks to bring a greater range of backgrounds to the boardroom. This year’s 2019 Investment Stewardship Annual Report acknowledges that Vanguard’s prior efforts in promoting gender diversity, though successful, do not capture all facets of diversity necessary for “effective boards of today and tomorrow . . . .”
In laying out its views, Vanguard published a list of expectations of public companies, including:
- Publishing company perspectives on board diversity.
- Disclosing board diversity measures.
- Broadening searches for director candidates.
- Making progress on increasing boardroom diversity.
For its part, Vanguard plans to use its influence as an investor to advocate for more diversity on boards and to engage with current directors on this issue. Vanguard will also consider a company’s progress in diversifying its board when making voting decisions and may also support shareholder proposals seeking increased disclosure about director diversity.
Institutional investors, industry groups, and companies themselves have made notable strides in driving growth in board diversity. As Vanguard notes, however, there is more work ahead to bring individuals with a broad range of personal characteristics into the boardroom.
[1] https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2019_investment_stewardship_annual_report.pdf
[2] https://corpgov.law.harvard.edu/2019/06/18/u-s-board-diversity-trends-in-2019/
