About the author: Michael Freichs Treasurer of the State of Illinois. John W. Rogers, Jr. Co-CEO of Ariel Investments and board member of McDonald’s, Nike and the New York Times.
A matter of leadership. But even the best leaders need advice, counsel, and – let’s face it – surveillance from different perspectives.
The oversight of U.S. business falls on the board of directors. Managers hire CEOs, evaluate performance, and help set a vision for the corporation. They apply vital administrative practices to the company’s integrity and performance, ensure the cultivation of an inclusive workplace and lead that workplace toward sustainable growth. To be effective in these tasks, boards must be made up of skilled people – and they must be diverse.
Diversified leadership helps companies better understand their customers, attract the best talent, and make smarter business decisions. A 2020 McKinsey study found that companies with the most ethnically diverse leadership teams were 36% more likely to experience higher profits and a significant performance differential – 48% – among the most and least gender-diverse companies.
Institutional investors, such as the Illinois State Treasurer’s Office and Ariel Investments, want companies to be increasingly transparent in the advancement of corporate governance — and that includes board diversification. But at present, federal law does not require companies to report on how diverse their boards are in public or accessible ways. A handful of states — among them Illinois — impose the need for disclosure But a few state laws are not enough.
In today’s united world, investors, employees and consumers are increasingly blaming corporations for their commitment to diversity. However, they lack access to quality diversified data. While some companies, including IDEX Corporation and Crown Castle International, provide strong disclosures about board formation and diversity practices, many companies provide vague information or none at all.
Companies often set business priority goals and refer to diversification as a “strategic obligation” on websites and in annual reports. But without information it is impossible to measure their progress. Diversification targets should be set to the same data-driven criteria that are required for companies to meet quarterly earnings guidelines per shareholder, or to implement a financial plan.
Therefore, in the best interests of the companies for the shareholders, firstly, to regularly evaluate the composition of their boards, secondly to establish policies and procedures to ensure diversity of the boards and thirdly, to disclose the composition of their boards.
Which is measured, is done. In Illinois, we are already seeing the impact of disclosure on board diversity. Since the board of companies headquartered in Illinois passed legislation requiring transparency in ethnic and gender makeup, more than 100 companies have released diversity data in 2021, and Groupon, Walgreens and other companies have added talented diversified managers.
Our respective organizations have partnered to promote better publicity and board diversity. In October 2020, the Illinois Treasury launched an alliance of 26 investment firms with পরিমাণ 3 trillion in assets, including Ariel Investments, which called on all companies in the Russell 3000 Index to disclose the makeup of their boards.
Our teams have already started this work at the regional level. The Illinois Treasury leads the Midwest Investor Diversity Initiative, a coalition of institutional investors whose work focuses on companies headquartered in the Midwest. MIDI employs local companies and works with company leaders to promote best practices. To date, MIDI’s work has resulted in 95 different board appointments and 50 companies adopting a diversified search policy.
A growing coalition of financial institutions, state policymakers and other market participants is engaged in this problem. Proxy advisors, including the ISS and Glass Lewis, now consider diversity when recommending boards. We are further encouraged that the Securities and Exchange Commission has approved Nasdaq’s board diversification rules, requiring listed companies to disclose diversification statistics or explain their failure to do so.
But federal law is needed. Congress should enact HR 1277, which requires all U.S. companies to disclose the diversity of their boards. There is a lot of work to be done. As institutional investors, we are committed to raising our voices in support of business diversification.
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