Show Your Colors: Shareholders Want More Diversity Disclosure – And For Good Reason

As requirements on diversity disclosure become more standardized, investors want to know how companies are integrating this sustainability factor in their strategies. And they are treating a lack of disclosure on gender and ethnic diversity as risk. Specifically, investors are becoming increasingly upfront in their push for more data on female and visible minorities’ representation on boards, executive teams, and within the workforce.

There are several good reasons for their requests. The emerging consensus among shareholders is that robust information on gender and ethnic composition leads to the development of stronger human capital and inclusion strategies. Perhaps more important, public, upfront sharing of the information can help keep activists at bay and prevent them from targeting your company.  

It’s not just an investor thing.

While shareholders are becoming more vocal in their requests for diversity information, they are not the only group clamoring for companies to be more forthcoming with their demographics. Researchers and data analysts are weighing in, too. In their article titled The ESG Data Challenge, Jennifer Bender and Stefano Maffina of State Street Global Advisors explained, “Data quality is crucial in the world of investment management, and especially so in the area of environmental, social and governance (ESG) investing, where lack of mandatory and consistent reporting of non-financial information by companies makes it challenging for investors to make decisions based on that information.”

Regulators concur. “For one thing, when companies have to formulate disclosure on topics, it can influence their treatment of them, something known as the ‘what gets measured, gets managed’ phenomenon,” said Allison Herren Lee, Commissioner of the Securities and Exchange Commission (SEC), in her speech during the Institutional Investors Fall 2020 Conference. She continued, “Moreover, when companies have to be transparent, it creates external pressure from investors and others who can draw comparisons company to company.”

5 Ways to Build Better Diversity Disclosure.

Meeting the needs of investors for additional diversity information is paramount. But take heed: it is easy to make missteps in this sensitive area. By following these best practices for setting up a data collection procedure and developing disclosures, you will help your organization deliver diversity information in way that is most beneficial to all your stakeholders:

1. Adopt well-established categories.
   • Definitions of ethnicity vary both philosophically and geographically. And that can be a hurdle for companies seeking to report the racial composition of their workforce.
   • In the U.S., however, a well-established format is becoming the standard for disclosure and a favorite among investors. And, the good news is, the Equal Employment Opportunity Voluntary Self Identification Form (EEO-1 Form) is something your company is already using to comply with Equal Employment Opportunity Commission (EEOC) rules. Employees complete the EEO-1 Form during the onboarding process and can choose from one of the following eight responses to describe their ethnicity:  
     1. Hispanic or Latino
     2. White (Not Hispanic or Latino)
     3. Black or African American (Not Hispanic or Latino)
     4. Native Hawaiian or Pacific Islander (Not Hispanic or Latino)
     5. Asian (Not Hispanic or Latino)
     6. Native American or Alaska Native (Not Hispanic or Latino)
     7. Two or more races (Not Hispanic or Latino)
     8. I do not wish to disclosure
   • Leveraging this information, provided voluntarily by your employees, eliminates concerns about privacy while increasing the efficiency in your data collection process. And it will satisfy shareholders, who are increasingly mentioning the EEO-1 Form as their preferred format for ethnic breakdown. ISS, which recently included the evaluation of racial diversity on boards as a factor in their corporate ratings system, is onboard too, and has adopted similar categories for disclosing board diversity.
2. Keep the local ethnic makeup in mind.
   • If your company operates outside the U.S., you’ll need to think beyond the EEO-1 as these categories would make little sense for employees working in a facility in Vietnam or Norway. In addition, some countries have specific mandates you will need to consider. France, for example, has century-old laws in place forbidding the categorization of French citizens by race or belief in the census. However, polls and surveys with such categories are allowed in most cases. In all situations where you operate abroad, take the time to understand the specific regulations, customs, and sensitives in each locale, and customize disclosure categories that are appropriate.
3. Show data on different levels of the company.
   • Companies are expected to show how women and members of certain ethnicities are represented at the board of director level, the executive suite, management, and the overall workforce. In other words, investors want to make sure it is not just entry level positions where you are onboarding diverse employees. Giving a detailed breakdown allows stakeholders to evaluate if the company has an open culture where professional advancement is not hampered by discrimination.
4. Put the numbers to work to address your risks and opportunities.
   • Collecting and reporting diversity data is one thing. But your obligation does not end there. Once you have a clear picture of the status of women and minorities in different sectors of your business, investors want to know that you are developing a strategy for mitigating potential risks and embracing opportunities. For example, given the recent trend toward engaging more women in technology, if you are a tech company that is currently 90% male, you have a clear opportunity and need to bring in some new perspective.
   • While not yet mandatory, setting goals for gender and ethnic diversity on the board is becoming best practice. One of the best-known goals on gender diversity was first proposed by the 30% Club in 2010. It calls for at least 30 percent female boards and c-suites by 2030. More and more companies are rising to the challenge and publicly joining this campaign.
   • Your company can demonstrate an even greater commitment to diversity by establishing key performance metrics around inclusion and promotion of certain demographics, and then tying those KPIs to your executive compensation plans. This can be more than goals for a certain percentage of people in certain roles; it can be based on your company’s professional development, training, and certification programs as well. Committing to preparing people with diverse backgrounds to fill future leadership positions in your organization sends a strong message that diversity is a priority for the long term.
5. Avoid approaches that can be perceived as tokenism.
   • The gender or racial background of a person should not be the only or most important factor for their inclusion on boards or executive management. Expertise, knowledge of the industry, and sector-specific skill sets will always be the priorities in prospective directors’ and executives’ evaluations. Downplaying those factors in favor of gender or ethnic diversity can be perceived as tokenism, a purely symbolic gesture made at the expense of the company’s human capital needs. There are plenty of talented and knowledgeable people of all genders and racial backgrounds out there. It would be a disservice to them to hire someone as director or CEO solely because of his immutable characteristics.

Remember, the more color, the better.

Robust and thoughtful diversity and inclusion disclosure that gets into the specifics about where your company stands now and where it hopes to be in the future is not only good for your investor relations; it is good for your organization overall. Keep in mind that investors are looking for this information not just to check a box. They are viewing it as a critical indicator as to how well a company is positioned to meet the needs of an increasingly diverse customer base. When you frame the issue this way in your own strategic initiatives, it sets the stage for a human capital strategy that can significantly improve performance and valuation alike.

If you’re interested in learning more about how Clermont Partners can help build better disclosures, contact us.