The 2023 proxy voting season continued to see shareholder requests for greater transparency and accountability on diversity, equity, and inclusion (DEI) matters. In recent proxy seasons, shareholders have been using their voting power to try and improve DEI-related disclosures at investee companies. Shareholders have historically used shareholder proposals to advance DEI issues on company ballots, and that continued to be the case in 2023. But this proxy season revealed some interesting trends regarding the incorporation of DEI-related issues into shareholder voting decisions that extend beyond shareholder proposals.
Recently, more investors began voting against directors’ elections where racial or ethnic representation was insufficient at the board level. If this practice was adopted by more shareholders during the 2023 proxy season, it may be partially attributed to one of the largest proxy advisors, Institutional Shareholder Services (ISS), updating its voting policies in the United States and United Kingdom1. In 2023, ISS began recommending that investors following its standard voting policies vote against the nominating committee chairperson’s elections if there was not at least one ethnically or racially diverse individual on the board. ISS will be extending this recommendation to Canadian companies in February 20242. At RBC Global Asset Management (RBC GAM), we have found that many large companies are providing greater transparency on the racial and ethnic diversity mix of its board members. However, for some companies, disclosures have not yet been adopted.
In order for investors to effectively incorporate DEI-related board data into their investment and stewardship activities, we believe it is imperative for companies to self-disclose.
As investors begin to vote against directors’ elections due to a lack of ethnic and racial diversity on boards, self-disclosure is becoming increasingly important for companies. If left undisclosed, investors and service providers seeking to leverage the data for stewardship activities may need to conduct additional analysis. Although a lack of data on ESG metrics is a common challenge in the responsible investment space, this may lead to instances where investors and service providers estimate whether a director is racially or ethnically diverse based on images, names, or organization memberships. This may result in investors voting against management based on incorrect data. In order for investors to effectively incorporate DEI-related board data into their investment and stewardship activities, we believe it is imperative for companies to self-disclose. At RBC GAM, we recommend that companies publicly disclose information on the diversity of their board of directors, their executive or senior management teams, and wider workforce.
Shareholders are now requesting additional disclosures, such as details on promotions, retention, and/or breakdowns of diversity and race in different levels of management.
The 2023 proxy season also saw a shift in some shareholder proposals asking for more detailed DEI-related information3. In certain jurisdictions, government entities and regulators require a report on a company’s workforce demographics. For example, in the United States the Equal Employment Opportunity Commission requires employers with at least 100 employees to submit an Equal Employment Opportunity (EEO-1) report on an annual basis4. Since companies are being required to collect and disclose this data to regulators already, it can facilitate disclosure to investors as well. This would benefit companies as there has been an increase in shareholder proposals relating to increased transparency in recent proxy seasons. Large-cap U.S. companies have made notable progress on this front with 70% of companies currently in the S&P 500 Index voluntarily disclosing their EEO-1 reports5. The EEO-1 report provides a snapshot of the current workforce demographics by race/ethnicity, sex, job category, and salary band6. However, shareholders are now requesting additional disclosures, such as details on promotions, retention, and/or breakdowns of diversity and race in different levels of management. In our view, these details can help illustrate the company’s emphasis on upward internal growth rather than a static image of the company’s ethnic and racial diversity. Transparency on hiring, promoting, and retaining employees also helps support a company’s stated progress on DEI initiatives, or lack thereof.
We also saw a mix of shareholder proposals requesting quantitative and/or qualitative data. For example, at Eli Lilly and Company, a U.S. health care company, shareholders requested enhanced disclosure on “the effectiveness of the company’s DEI efforts… using quantitative metrics for hiring, retention, and promotion of employees, including data by gender, race, and ethnicity.”7. When not already disclosed, investors are increasingly requesting quantitative data to facilitate the incorporation of DEI into investment and stewardship decisions. We believe more readily available and consistent data can assist in monitoring company progress on DEI programs, and help investors more easily compare company efforts against peers. Requests for quantitative and/or qualitative disclosures may help shareholders determine if a company is assessing and managing its DEI-related risks and potential opportunities effectively.
Managing DEI-related risks and opportunities can promote a culture of creative and innovative development and lead to lower turnover, higher employee morale, and the ability to attract and retain talent.
At RBC GAM, we believe that companies with strong DEI policies and procedures can be better positioned over the long term. It is our view that managing DEI-related risks and opportunities can promote a culture of creative and innovative development and lead to lower turnover, higher employee morale, and the ability to attract and retain talent. Furthermore, we believe companies with inadequate policies may face reputational, operational, litigation, and other risks that may adversely impact their long-term value. To effectively incorporate material DEI issues into investment decisions and stewardship activities, investors require consistent and repeatable disclosures from issuers. There is still room for improvement in this regard, with some markets having more work to do than others. As such, we expect that DEI will continue to be a prominent topic on company ballots in the coming years.
Additional Resources
[1] https://www.issgovernance.com/policy-gateway/voting-policies/
[2] https://www.issgovernance.com/file/policy/2022/2023-Benchmark-Policy-Changes-For-Comment.pdf
[3] As of September 7, 2023
[4] https://www.eeoc.gov/employers/small-business/legal-requirements#:~:text=Employers%20who%20have%20at%20least,Department%20of%20Labor%20every%20year
[5] Proxy season 2023: increased expectations and unintended consequences, Harvard Law School Forum on Corporate Governance.
[6] https://www.eeoc.gov/data/eeo-data-collections
[7] 2023 Eli Lilly Proxy Statement