Board Diversity Policy

Nicholas J Price

In recent years, shareholders have been increasing pressure on boards to include more women and minorities, as they feel they will be better represented that way. Boards have often given in to the pressure to create new policies around board diversity. In some cases, companies have already changed many of their other policies, including their hiring policies, and changed their corporate culture to be more inclusive.

In many cases, companies have felt that they've done enough to convince shareholders that their current policies extend to their board director recruitment efforts. With this perspective in mind, some boards have questioned whether they need to divert from their efforts of planning and oversight and create a policy for board diversity when they don't even feel that it's a problem. As the most recent situation with Amazon shows, companies may be inclined to create the policy to assure shareholders that the company is listening to their concerns and that they're willing to respond to them.

Amazon Shareholders Insist on a Board Diversity Policy

Amazon shareholders led the proxy initiative asking for a formal diversity policy at the May 2018 stockholders' meeting. When Amazon didn't respond favorably to their request right away, they contacted the media in order to place additional pressure on the board. Specifically, Amazon shareholders were looking for a board diversity policy that would assure them that the company would consider women and minorities for vacant board director seats.

The idea of placing pressure on boards to consider diversity in their choices stems from the Rooney Rule, which was established by the National Football League (NFL) in 2003. The policy requires NFL teams to interview ethnic minority candidates for coaching and senior management jobs in operations.

Board diversity policies are often also equated with affirmative action. Other industries have also made moves to create policies for board diversity.

Facebook has taken the initiative to create a board policy for ethnic and minority diversity on its board. In the shareholder proposal for Amazon, the letter made note of trendsetting companies that had already created policies for board diversity, such as Costco Wholesale, Gentex, Home Depot, IDEXX Labs, Stryker Corporation and Whole Foods Market (which is owned by Amazon).

The board directors at Amazon didn't quickly discard the idea of creating the board diversity policy. Instead, they spent some time reviewing and evaluating whether the issue was a problem worth addressing. Ultimately, board directors came to the conclusion that they'd make enough effort in creating board diversity and that they had bigger fish to fry.

In 2017, Apple found themselves in a similar situation and gave a similar response, claiming that their efforts were already broader than what the shareholders were proposing.

Unlike the Apple situation, Amazon shareholders persisted. Shortly after shareholders got the final word from Amazon, they pressed on, gaining the support of the Institutional Shareholders Institute, the Congressional Black Caucus and the Congressional Hispanic Caucus.

Seeing no other viable alternative, Amazon caved to their request and created a board diversity policy that requires the board to consider women and minority candidates in their slate of recommendations for the board. While Amazon agreed to make changes, they also acknowledged that they were merely formalizing practices that were already in place.

While it sounds like a reasonable effort on Amazon's part, critics have noted that among Amazon's 17 peers, all boards have at least one board director of color and 10 of them have at least three board directors of color. Amazon does have four women on its 11-member board of directors, and two of the women are minorities.

Getting Ahead of Shareholder Concerns Over Diversity

To eliminate shareholder concerns over diversity, boards can get ahead of the issue by taking steps now to assure shareholders that they value the benefits of board diversity. One thing that boards can do is to include a Rooney Rule or similar provision in their annual proxy statement and corporate guidelines, as well as reviewing and updating the language in their statements on director selection.

Another thing that boards can do is to make note of board demographics in their proxy statements by using a matrix or other graphic that captures shareholder attention. A simple task that boards can pursue is to engage with their stockholders and other stakeholders long before proxy season to inform them of their stance and efforts toward enhancing diversity on the board.

Creating a Board Diversity Policy

A board diversity policy doesn't have to be an overly lengthy or wordy document. It merely needs to indicate the board's intention for enhancing the diversity of its board members. Boards may consider including some of the following issues in their board diversity policies:

  • That the nomination committee should take the company's board diversity policy into consideration when making recommendations for board director vacancies.
  • That board directors will be considered according to their merits, in addition to the benefits of diversity they might bring, including diversity of thought, age, gender, nationality, and personal and professional experience.
  • That board director nominees will have knowledge of the company's operations and its markets.
  • That the nominating committee may also factor in such traits as financial expertise, knowledge of sustainability measures, geographical representation, business expertise or other similar competencies.
  • That, in addition to appropriate skills and abilities, the nominating committee will also consider personal qualities, ethics and integrity.
  • That the board shall strive to achieve a reasonable and balanced gender distribution.
  • That the nominating committee will consider the company's development stage in making recommendations.
  • That the number and composition of board directors will reflect the needs of the company.
  • That the board shall take board self-evaluations into consideration when evaluating the board's needs.
  • That the board shall consider its strategic planning and its connection to other operations when making recommendations for board directors.

Nomination committees should be intrinsically involved in creating the final draft of the board diversity policy so that the final policy reflects a good variety of skills and experiences, in addition to accounting for diversity. In knowing the board diversity policy well, nominating committees will be more likely to identify the best candidates.

Governance Cloud is a board management software system that brings together a suite of software solutions that create efficiency for many of the board processes, such as board self-assessments, strategic planning, policy-making and board communications, that are necessary for creating a board diversity policy. Diligent Corporation provides all these products under one highly secure platform that prevents cybersecurity incidents. It's the best way to conduct board business that meets the needs of board members and shareholders.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.