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Color blind? How boardroom diversity data eludes advocates

[September 16, 2020] By Ross Kerber, Jessica DiNapoli and Simon Jessop

BOSTON/NEW YORK (Reuters) - Last month CtW Investment Group urged Fresenius Medical Care AG to add diverse directors to its board. The group determined the German company lacked diversity by studying photos of directors and reviewing their backgrounds online to determine their race.

"It’s a very crude way," Dieter Waizenegger, executive director of labor-affiliated CtW, acknowledged in an interview with Reuters. He added that without formal declarations by the directors themselves, outsiders could not be certain of their race.

Fresenius said its six-member board includes directors of five different nationalities and two women. But a spokesman noted that the company does "not ask our board members, nor our employees, to make statements on their ethnic or racial origins."

Racial diversity in the boardroom has come under new scrutiny after the death of George Floyd, an unarmed Black man, in police custody in May triggered global protests about racism in Western societies.

But as investors, executives and politicians demand greater racial and ethnic diversity in Western corporate boardrooms, they say they are running into a thorny problem: how to tell the ethnicity of directors in the absence of much self-reporting and disclosure.

The lack of data, they said, is slowing progress on efforts to improve diversity in the top echelons of global corporations. Their attempts to increase disclosure so far have run into hurdles, such as concerns the practice is divisive or that some directors don’t want to list their family backgrounds.

"We would like to see the makeup of all directors," said Benjamin Colton, co-head of stewardship efforts at State Street Corp, which has $3.1 trillion under management. "We understand there may be directors who don't want to self-identify, and in those cases we might engage on that a little more."

Sandy Boss, stewardship chief at BlackRock Inc, said the world’s largest asset manager is reviewing its current policy on diversity for its portfolio companies. The policy currently says companies should have at least two women directors but does not give specific guidance on racial representation.

She acknowledged the lack of disclosure of executives' ethnicity could make it hard to push for change. "Data is quite important here," Boss said.

LOW REPRESENTATION

The lack of boardroom diversity is stark. Among the top 200 companies in the S&P 500, African-Americans hold only about 10% of board seats and Hispanic or Latino people hold only 4% of board seats, according to executive search firm Spencer Stuart. That representation falls below their shares of the U.S. population of 13% and 19%, respectively.

For a chart showing boardroom representation, click https://tmsnrt.rs/3khbrRn

Factors including insular social and professional networks have kept boardrooms largely white for years. Some business leaders also blame a relative lack of minority CEOs, a traditional resume item for directors, leading to calls for companies to recruit candidates with other backgrounds.

Women are also underrepresented on boards, but they have made faster gains in recent years. https://rb.gy/fqppdw

Analysts say one reason is that top investors, including BlackRock and State Street, have prioritized gender diversity, which is easier to determine by name.

The concern about underrepresentation of minority groups is leading to new data-gathering efforts and legislation. A number of U.S. companies have started to include racial identification tables in their annual proxy statements in recent years, for example. Some states, such as Illinois and California, are also mandating steps to improve corporate diversity.

In addition researchers Institutional Shareholder Services and Equilar have each launched new efforts to gather more diversity data, both drawing on information from groups including the Latino Corporate Directors Association.

Esther Aguilera, the president of the association, said her group has been calling and emailing current and potential directors to ask if they would like to be included in its database. "If the individuals were to self-identify in a table somewhere, then we wouldn't have to go through this song and dance," Aguilera said.

These efforts, however, are fledgling and the data are patchy. Researcher Just Capital says 21% of 931 companies in the Russell 1000 index now offer at least some information about their boards’ racial diversity. But often it is not very specific, and the range of disclosures is wide.

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Mary Winston, a director on the boards of Bed, Bath & Beyond, Chipotle and other companies, poses in an undated photograph. Courtesy of the National Association of Corporate Directors/Handout via REUTERS

Some give only a general percentage. Medical device maker Boston Scientific Corp, for example, said in its proxy this year that its 10-member board is 70% white and 30% "ethnically diverse."

Boston Scientific General Counsel Desiree Ralls-Morrison said in an e-mail that as investors grew more interested in boardroom diversity, the company started making the disclosure in 2018 "as part of a broader effort to make key governance insights more accessible."

Others go further and specify the race and gender of each director. Utility holding company Edison International, for example, has a table in its latest proxy filing that shows one director as African-American and two others are Hispanic. Michael Camuñez, one of the two Hispanic directors, is also identified as part of the lesbian, gay, bisexual, transgender and queer community.

In an interview, Camuñez said he suggested the identification in early 2018 and was met with enthusiasm. "I do identify as Latino and as an openly gay man, and the days when that had to be a source of concern or fear are long behind us. I felt it was important to stand up and be counted," he said.

Donna James, an African-American woman who is a director at Boston Scientific Corp and L Brands Inc, said the extra detail would help broaden diversity efforts beyond adding more women to boards.

"Gender diversity is a good first step, but we can't stop there," said James. She declined to discuss actions by specific boards.

More corporate disclosures are likely, according to Spencer Stuart managing partner Julie Daum, but some directors might not want certain characterizations publicly listed, or might recall how such information was once used to exclude minorities.

"It's one of those touchy issues," she said. Spencer Stuart estimates directors' race by checking sources like proxies and the affinity groups a person lists in their biographies or LinkedIn pages.

FORCING QUOTAS?

Recently, California legislators passed a bill mandating boards have one director from an underrepresented community by the end of next year, and requires the state to publish a report on companies' compliance. But the bill faced opposition from some lawmakers who argue it is overreach by the government.

"Rather than using the heavy hand of government to force quotas, Senator Brian Jones believes consumers in the marketplace and shareholders in the boardroom are a better approach," said a spokesman for Jones, a Republican from Santee, California, near San Diego.

Mary Winston, an African-American woman, member of the National Association of Corporate Directors and director at companies including Bed Bath & Beyond Inc, said the law is needed to force companies to act.

"If there are no metrics, it's hard to hold people accountable," she said.

(Reporting by Ross Kerber in Boston, Jessica DiNapoli in New York and Simon Jessop in London; editing by Paritosh Bansal and Edward Tobin)

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