Securities Regulation Daily NYC comptroller urges companies to adopt policies to improve board, C-suite diversity
Friday, October 11, 2019

NYC comptroller urges companies to adopt policies to improve board, C-suite diversity

By Mark S. Nelson, J.D.

New York City Comptroller Scott Stringer said public companies should adopt a version of the National Football League’s hiring policy in order to promote gender and racial diversity on boards of directors and in the C-suite.

New York City Comptroller Scott Stringer announced at the annual Bureau of Asset Management "Emerging and MWBE Manager" conference that his office will press companies to adopt a version of the National Football League’s "Rooney Rule" through a new investor initiative aimed at promoting racial and gender diversity among public company boards and executives. Stringer said companies should emulate the NFL’s hiring policy by considering women and minorities for all open board seats and for the role of CEO. The initiative would be the third building block in the comptroller’s now five-year-old Boardroom Accountability Project, which previously sought to expand proxy access and to promote more fulsome disclosures about directors via the board matrix.

"In New York City, we refuse to believe that diverse candidates don’t exist. We know better—because in our city, diversity isn’t a buzzword, it’s an airtight commitment," said Stringer in a press release. "As a pension system, we want to invest in 21st century companies that represent the future—not companies with management teams that look like they’re out of the 1950s."

The Rooney rule and the S&P 500. The Rooney Rule takes its name from that of Dan Rooney, the former owner of the Pittsburgh Steelers and chairman of the NFL's diversity committee. The NFL adopted the Rooney Rule in 2003 to address the league’s lack of diversity among its head coaches, but since then the rule has been expanded several times to include front office positions such as that of general manager and more recently to include, among other things, the best practice of considering multiple diverse candidates.

The highlight of Stringer’s presentation was the publication of a letter his office sent to 56 companies in the S&P 500 Index, which he said have not disclosed Rooney Rule-compliant policies on gender and racial diversity. The letters, exemplified by one sent to The Kraft Heinz Company, call on public companies to apply a version of the Rooney Rule to include qualified women and racially/ethnically diverse candidates on lists of new management-backed nominees for director and CEO. The letters also urge companies to apply the comptroller’s version of the Rooney Rule to their outside consultants who conduct searches for directors and executives.

The letters cited reports by McKinsey and MSCI that suggest diversity can drive public company performance while potentially lessening the risks posed by corporate activities that may involve criminal or fraudulent conduct. The letters also suggested that diversity in the boardroom and in the C-suite can lessen the risk of "groupthink," in which a group of people with like beliefs may overlook risks because of their inability to question their own assumptions.

Moreover, the letters ask companies to include director candidates with non-traditional backgrounds (e.g., government, non-profit, or academic). The letters said that too often companies abide by a policy of recruiting only directors with prior board or C-suite experience, a practice that can limit the pool of candidates from which a company can select new board members. A related issue, the letters noted, is the "over boarding" of the comparatively small number of women and minority director candidates who do possess prior board or C-suite experience. The letters also cited a report by Russell Reynolds suggesting that companies with boards that have women and minority members tend to have more women and minorities in their C-suites.

According to the letters, the purpose of a public company Rooney Rule is to create opportunity. "It does not dictate who should be hired and does not mandate an outcome. It does[,] however, widen the talent pool and require the inclusion of a diverse set of candidates for consideration."

The letters also cited seven S&P 500 companies that have already adopted a version of the Rooney Rule, including the industrial conglomerate General Electric and newer technology services companies like Amazon and Facebook. The comptroller’s office itself plans to invest its assets under management consistent with its expectations for companies by increasing the target amount of assets invested in Minority and Women Owned Enterprises from 10 percent to 12 percent.

Varied approaches to diversity. Stringer suggested that he would like to see office’s approach to corporate diversity yield results similar to its approach to proxy access bylaws, which 6 companies had when the comptroller began its proxy access initiative five years ago but now numbers 600 companies and includes more than 70 percent of companies in the S&P 500 Index. By contrast, a small number of states, the SEC, and Congress have pursued varied approaches to enhancing corporate board diversity. The SEC, for example, recently addressed the issue by updating its Compliance and Disclosure Interpretations on the topic. Several bills also have been introduced in Congress that seek to improve corporate diversity.

California was the first state to enact a law requiring at least one female director on the board of each public company based in California; the number of female directors required varies by the size of the board. Former California Governor Jerry Brown singed the bill into law, but he also noted that it may face legal challenges. Some commentators had cautioned that it could violate federal and/or California equal protection principles or other state constitutional requirements.

Judicial Watch, Inc. has field what may be the first lawsuit on behalf of three California taxpayers seeking to enjoin the California law based on alleged violations of Sections 7 and 31 of Article I of California’s constitution. Section 31 prohibits the state from discriminating on the basis of, among other things, sex. An amended complaint in the case added a challenge based on Section 7, which addresses due process of law and equal protection of the laws.

Illinois initially appeared to be headed toward enactment of a similar law that would have expanded upon the California mandate by requiring inclusion of female and African-American directors. The version of the Illinois bill that became law, however, dropped the quota requirements in favor of corporate disclosures and publication of aggregate data on corporate diversity in the state. The NYC Comptroller’s focus on "female and racially/ethnically diverse candidates" (emphasis in original) tracks the early version of Illinois’s legislation but without the quotas.

Moreover, business industry groups have advocated for board diversity. The NYC Comptroller’s letters, for example, invoked the Principles of Corporate Governance published by the Business Roundtable (BRT). Specifically, the comptroller cited the following passage: "Boards should develop a framework for identifying appropriately diverse candidates that allows the nominating/corporate governance committee to consider women, minorities and others with diverse backgrounds as candidates for each open board seat." The sentence preceding the quoted text notes that diverse boards can perform better and can aid the delivery of long-term value to shareholders.

The BRT recently published another statement describing the purpose of a corporation as including "diversity and inclusion, dignity and respect" for employees as part of a shift away from shareholder primacy. The new statement does not explicitly mention board or C-suite diversity.

Companies: The Kraft Heinz Company

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FedTracker Securities

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