Board composition is increasingly at the forefront of governance activists’ focus and initiatives. A recent, high-profile example of this comes from New York City Comptroller Scott M. Stringer and the New York City Pension Funds via their Boardroom Accountability Project 2.0. This initiative builds on their 2014 initiative and, according to their press release, is intended to “ratchet up the pressure on some of the biggest companies in the world to make their boards more diverse, independent, and climate-competent, so that they are in a position to deliver better long-term returns for investors.”
The campaign directly targets the boards of 151 U.S. companies, calling on them to “disclose the race and gender of their directors, along with board members’ skills, in a standardized ‘matrix’ format and to enter into a dialogue regarding their board’s ‘refreshment’ process.” They believe this will push boards to be more diverse and independent. The targeted companies include “139 that enacted proxy access after receiving a proposal from the New York City Pension Funds, and 12 at which the pension funds’ proposal received majority shareowner support in 2017, but have yet to enact the reform.”
Comptroller Stringer and the Funds blame the “persistent lack of diversity on corporate boards” on a nomination and election process “that is effectively controlled by the existing board — and as a result, more akin to a coronation.” They cite PwC’s 2016 Annual Corporate Directors Survey as reporting that 87% of directors rely on board member recommendations to recruit new directors, while only 18% consider investor recommendations.
Fundamentally, they believe that shareowners “need to know the race and gender of a company’s directors” and “need to see how each director’s skills and experience fits into the company’s overall strategy, where there are gaps, and understand how boards are refreshed.” This information would be released every year as a “board matrix,” thereby allowing shareowners “to identify boards that are ill-suited to protect their investments due to a lack of diversity or relevant expertise” and “to engage companies to recommend qualified, diverse, and independent candidates.” Their recommended standardized matrix would name each director and then indicate via checkmark whether he or she meets a laundry list of “Skills & Experience” and “Demographic Background” criteria, including tenure, sexual orientation, gender, age, and race/ethnicity.
The Board Accountability Project also seeks to encourage companies to “commit to working with them and other large, long-term shareowners to identify suitable independent candidates — including ones that bring diverse perspectives and other skills, such as climate expertise, to the boardroom.”
The press release suggests that this is an outgrowth of the SEC’s failure to take action on a 2015 rulemaking petition by the NYC Comptroller’s Office, New York City Pension Funds and “eight other major U.S. pension systems” that would make this type of disclosure mandatory market-wide.
Wow! That’s a lot to take in. The Board Accountability Project strikes me as an unusually aggressive effort to ratchet up institutional investors’ influence over board composition and ultimately over corporate governance itself. Though it is not surprising that the SEC has not leapt to adopt corresponding rulemaking, corporate governance developments tend to be momentum-driven, beginning with just these types of initiatives among large companies. One wonders, therefore, just how much momentum this one will generate. Does it represent the next big thing in governance or will it fizzle and die … or do something in between? Time will tell.
All the best,