Companies are reconfiguring their businesses to obviate any fallout from potential liabilities through greater adherence toward environmental, social, and governance principles. As they prep, the issue of diversity could be a major sticking point.
Investment demand has shown that the ESG theme is quickly gaining traction. According to investment bank Lazard, there are now more calls for corporations to make their leadership ranks more diverse as ESG metrics draw more attention, Barron’s reports.
According to Lazard data, in 2020, 11% of activist-appointed board directors were ethnically diverse and 24% of directors were women. Both metrics fell behind new board members for S&P 500 companies by roughly half.
Now that big three institutional investors BlackRock (BLK), Vanguard, and State Street (STT), along with proxy advisors Institutional Shareholder Services and Glass Lewis, all pushing for diversity and inclusion as a major focus, activists will need to do more to win their support.
Activists shifting into ESG and diversity is not just a feel-good story. The practices have produced positive, quantifiable results in businesses.
“The rise in the launch of ESG-related funds and campaigns focused on sustainability issues enables activists to improve perceived ESG weaknesses in businesses but also bolster fundraising by branding themselves as forward-thinking and socially conscious,” according to Lazard.
A recent McKinsey study has found that diverse companies are 33% more likely to generate greater returns than their less-diverse peers.
Some are already making the necessary changes. Nasdaq issued board diversity requirements for companies listed on the exchange, Charlotte Kiaie and Rachel Goun write for CorpGov. States like California are already requiring racial or sexual minority representation in the boardroom. Consequently, major shareholders could continue to call for companies to target above-average diversity at the leadership levels.
Meanwhile, influential institutional investors and proxy advisory firms are now more unlikely to back an activist if a slate of director candidates show a dearth in diversity of gender, race, and experiences.
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