As part of this effort, the company launched “10 Actions Against Racism and Inequality” and made these commitments public to increase accountability and motivate peer companies to take action too.
Commitment #7 tasked the Asset Stewardship team at State Street Global Advisors, one of the world’s largest asset managers, to leverage their engagements with thousands of investee companies to glean best practices for advancing racial and ethnic diversity, equity and inclusion. The Asset Stewardship team chose to focus on the topic of board oversight, given the team’s governance expertise and the relative lack of literature regarding this dimension of diversity. The State Street team partnered on this effort with Russell Reynolds Associates due to their board governance expertise and extensive relationships with corporate directors, and the Ford Foundation, given their connection to movements for racial justice. The three organizations worked together on this study of the best practices for effective oversight of racial and ethnic diversity, equity and inclusion.
We first consulted academic and policy experts to identify the main risks and opportunities related to strong oversight of racial diversity, equity, inclusion and justice. We then conducted interviews with 27 experienced directors from S&P 500 and FTSE 100 companies. These conversations informed the development of this paper, and our analysis of directors’ comments resulted in our enclosed “10 Responsibilities of Boards in the Effective Board Oversight of Racial and Ethnic Diversity.”
Board oversight is about ensuring that management is focused on risks and opportunities that are relevant for the firm. Our hope is that boards will incorporate this guidance into their oversight practices in a way that is tailored to their particular company’s context. We believe the following insights provide a view into boardroom discussions and also offer a roadmap for how companies can more effectively manage and mitigate risks related to racial justice, thus making our world more equitable.
As part of our research, we interviewed 27 directors from the S&P 500 and FTSE 100. The group was approximately half women and nearly two-thirds people of color. The companies on whose boards they serve represent all sectors.
We extend our gratitude to these directors:
While most directors spoke to us with an understanding they would be quoted anonymously, several chose to waive that and have their quotes attributed to them in the paper.
We also appreciate the academics, policy experts and thought leaders who contributed to our understanding of the key business risks and opportunities related to racial and ethnic diversity, equity, inclusion and justice.
The Board’s Oversight of Racial and Ethnic Diversity, Equity, and Inclusion
What motivates board oversight of racial equity: The following risks and opportunities motivated directors’ increased focus on racial and ethnic diversity, equity, & inclusion (DE&I): reputation, strategy, financing, regulatory and compliance, and human capital. Directors did not cite the potential economic impact of racial inequity as a key motivator.
Racial and ethnic diversity “has been on the board agenda” in the past, as one director said, “but it’s certainly never had the focus it has now. On one hand, what took so long? On the other hand, at least we can now move the needle.” Another director agreed: “It keeps coming up, but in the last 18 months, it has become more of an imperative.”
Given State Street Global Advisors’ perspective as a longterm investor, and with input from diversity, equity and inclusion (DE&I) experts, our organizations identified six key business risks and opportunities related to racial and ethnic diversity. Our discussions with directors helped us understand which risks and opportunities are motivating their increased attention to the issue of racial diversity, equity and inclusion (they are listed below in descending order based on how often they were raised in our conversations with directors):
[See appendix for examples of indicators boards can use to assess performance in each of these six areas.]
As with other dimensions of corporate governance, the board must decide who has responsibility for the oversight of racial and ethnic diversity: the full board or a specific committee? And if a committee, which one? Answers varied among the directors we interviewed. Only a few boards addressed the issue solely in full-board meetings. Each of the major board committees was mentioned as having relevant responsibility for issues related to the oversight of racial and ethnic diversity:
In a recent survey of NomCo chairs, when asked to identify the top three most important organizational efforts the NomCo was involved with:6
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Several directors indicated that corporate social responsibility, public policy or similar committees have responsibility for DE&I, but these board committees are less common given that only the three aforementioned committees are required by most exchanges.
While the discussion often starts in one committee, it rarely stays there. One director noted that “While each committee is seeing a piece of it, it bubbles up to discussion at the full board because it is coming from several committees.” Discussions at the full-board level can also advance a more coordinated approach to DE&I: “What we want to see is a concerted, integrated, comprehensive strategy to address inclusion and diversity across the company.”
The oversight of corporate culture seems to be one of the driving forces behind these discussions. Corporate culture is increasingly recognized as one of the intangible value drivers affecting a company’s ability to execute its longterm strategy.7 “If you look at companies that have had the biggest problems recently, it is always about the culture,” one director said. “The culture conversation is a lot more subtle and nuanced and is the responsibility of the full board.”
While every board has a unique set of priorities, there are a number of common areas that most, if not all, directors reported focusing upon:
Addressing racial equity: A stakeholder perspective
Directors might consider the priorities articulated by PolicyLink, FSG, and JUST Capital in their “2021 CEO
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Beyond these topics, issues as wide-ranging as board diversity, pay equity, supplier diversity and corporate philanthropy were all raised during our discussions, highlighting the myriad issues directors are facing, the complexity of the topic and the depth of the board’s role.
Despite an awareness of reputational and other risks associated with a lack of attention to racial justice, very few directors spoke about oversight of the potential impacts of their company’s products, services or operations on communities of color. “I had a conversation, literally on a board call, where I was explaining equity and equality,” one director said. “Part of it has been getting people to understand the difference, prioritizing and elevating voices and communities that have been ignored in the past. You’ve got to figure out a way to get them more equity, to give up capital so they can become owners with you.”
In a recent global survey of executives, CEOs and other C-level executives at companies with over $1B in annual revenue reported a link between compensation and major corporate goals:9
Setting goals is essential to directing a company’s DE&I strategy and holding management accountable for progress. “We set targets for how you move along the D&I journey,” one director said, “and those should be stretch goals so people can feel they have something to reach for but that they’re not out of reach. We set goals for increasing diversity in the organization at different levels and across different areas.”
A number of directors indicated not only a willingness to tie executive compensation directly to DE&I, but a belief that it is a critical step to bringing about positive change. “Things moved when you tied compensation to it,” Tom Baltimore told us. “Compensation is always important; it gets measured, and people are held accountable—executives will respond” to the goals the board established. Analysis by RRA shows that while a sizable minority of CEOs in the US (43 percent) have their compensation tied to ESG goals, it is relatively uncommon for CEOs in the US or the UK to have their compensation clearly connected specifically to DE&I outcomes—only 29 percent of US CEOs and 25 percent of UK CEOs surveyed indicated their compensation was tied to DE&I outcomes.
Directors at companies with DE&I-related compensation plans acknowledged that there was often concern with how executives would be measured, what data would be used and whether the executives were being set up for success. “It was difficult. There was lots of pushback,” one told us. “It’s difficult to have that conversation, but that’s where, if you agree on the goals that affect compensation, it’s easy for the CEO to charge HR and the executive team to come back with an appropriate team and proposal that makes it happen. They have to sell it, and the executives have to buy it.” Another director agreed, but noted that some topics—like having an inclusive culture or ensuring employee safety—should be table stakes for leadership, not something that in and of itself is rewarded with more compensation.
Several directors cited data quality and availability as an ongoing challenge. “The more data you have, the more you’re able to do something about it,” one director said. But quantitative employee demographic data can be hard to come by—and easily misunderstood. Employee surveys also present their own challenges. “Longitudinal satisfaction surveys are important, but they’re often too high level,” one director said. Another admitted that “with the surveys we do of employees, we are still grappling with how to understand the feedback.”
The oversight of racial and ethnic diversity is challenging when operating within a single country—it gets significantly more complex in a multinational organization. “It is not one size fits all,” one director told us. “Diversity has a different meaning in India, in the Middle East and in the United Kingdom. It’s not the same as in the United States. Things are not quite so clear when you’re looking across international borders.”
Access to data is one hurdle boards must overcome. While companies in the United States can use the federal government’s EEO-1 data to get a view of workforce demographics, a director pointed out that “in some countries in Europe, it’s illegal to ask for diversity data—and that makes it even trickier.”
Companies also risk having robust data but reaching incorrect conclusions. “As you can imagine, it is actually very important to track someone’s ethnicity as it relates to the market,” a director said. “If you look at the number of senior Black leaders we have in our company, it’s a pretty high number. That’s because all of our senior leaders across each one of our African markets is Black, and we are in every market in Africa. So, for us not to track just Black ethnicity, but specifically British or American Black people as well, is a very important distinction.” Compounding all of this is a risk that international diversity and racial and ethnic diversity can be confused. “Adding an African is not the same as adding an African American,” one US director said. “We have to do both.”
Another part of the challenge is directors’ mindsets. “I think a lot of US-centric executives haven’t been exposed to global issues, and they try to impose US diversity thinking onto an international population, which I don’t think is appropriate or helpful,” one director said. “There are real diversity issues around the world, and US solutions are not necessarily the right solutions elsewhere. I think the issues we talk about in global companies are far different from what most US-centric companies talk about.” The same is true for US-based companies with non-US directors. Conversations about DE&I differ so significantly across countries and regions that directors need specific education from each board they sit on regarding DE&I in that particular context, including available data and applicable laws. It is also important for directors of global companies to consider their shareholders and to be prepared to discuss DE&I with US- and UK-based investors.
Our conversations with directors led to the development of “10 Responsibilities of Boards in the Effective Board Oversight of Racial and Ethnic Diversity,” a roadmap for boards that want to elevate their focus on DE&I. We encourage boards to consider integrating these recommendations into their oversight practices in a manner tailored to their organization’s culture and governance frameworks.
The increased risks and opportunities associated with racial and ethnic diversity, equity, and inclusion necessitate a sharper focus on this topic from boards. We hope that directors will internalize the insights from this paper, generating more value for investors, employees, and other stakeholders.
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