Q&A

Investors have new expectations and standards as it relates to the structure and composition of boards and what they should look like looking towards the future. In terms of board diversity, there has been an increasing amount of pressure to improve diversity standards on corporate boards. Board diversity is front and center for many companies across the nation. Issues ranging from a lack of gender or ethnic diversity, to sexual harassment cases have prompted an outcry from investors for companies to make changes at the top. In today’s corporate governance environment, a lack of diversity no longer is acceptable and investors are not shy to call out companies who are not showing much needed improvement.

Keir Gumbs sits down with 2engage for a Q&A to share his insights on this very important issue trending top of mind in corporate governance.

Alvin Huntspon: To move the needle forward on board diversity we have seen a number of actions take place recently to push corporations in the right direction. For example, proxy advisors and investors have updated their guidelines asking companies to meet certain gender diversity quotas. Pension funds and top investors are steadily pushing for more diversity and taking aggressive approaches to bring awareness to companies who need to make progress. We are now seeing state sponsored bills that call for a mix of diversity on corporate boards. Even millennials are paying close attention to the makeup and structure of boards because they want to ensure they are making socially responsible investments. Research has proven that companies perform better when the boardroom is diverse. All of these areas have boards taking a close look at diversity.

One of the biggest drivers for the latest push for companies to improve on diversity has been the uptick in sexual harassment cases plaguing CEOs and senior leadership at companies across the nation. Investors believe outcomes and disciplinary actions related to parties who made complaints may have been handled differently if diversity, tone and culture at the top were balanced. What are your thoughts?

Keir Gumbs: The biggest concern for boards is whether  they are doing enough to understand and monitor these issues. Over the last year, or maybe even the last decade, boards have become unwilling to accept behavior from their senior executives that might suggest that they were engaged in sexual harassment or having inappropriate relationships with people who work for the company, or things of that nature. It’s a real challenge. How do you deal with that? It creates an uncomfortable level of consternation. For boards, how do you balance the need to take complaints and allegations seriously and have the tough conversation while trying not to create a situation that invites people to make unfounded allegations about senior executives. Not that this is happening, but that is a concern. Right now, the bigger concern for boards is not reacting swiftly enough, or not doing enough. I think we are in the beginning stages of change in how boards and executives deal with these kinds of issues. We are entering a space where boards are really going to have to consider what protocols do you put in place to make sure that their executives are not engaging in that kind of conduct and if they are, making sure they are properly addressing these situations when they happen, while also taking the administrative action needed even if that means termination. Boards should be preparing now with a proactive plan as opposed to a reactive plan. The hardest thing a board can do is fire a CEO. Most board members have an affiliation with the CEO, so when it comes time to terminate, it makes the conversation much harder to deal with than another executive at the company. This is a really tough issue for boards to grapple with, boards are going to have to come to terms with any misconduct of this nature at their company and respond accordingly. Additionally, if a CEO is removed for misconduct, not having the right CEO in place or an identified successor can impact the bottom line, among other things. Fortunately, most companies are not in that scenario, but a scandal and its impact can have a very meaningful impact on the company. Not responding could also have an adverse effect on the company, which could amount to shareholder pressure or even activism.

Alvin: There has been a great deal of pressure for boards to have a minimum quota of female representation (on average two to three depending on the total number of board members). In addressing diversity, the attention has focused on gender diversity and then ethnic diversity, we see the needle is slowing moving to continue to increase this type of diversity. One area of diversity that does not get much attention is sexual orientation. We are now seeing movement from investors for companies to reveal the sexual orientation of directors. For example, the New York City Comptroller’s Boardroom Accountability Project 2.0 requests that companies disclose the sexual orientation of board directors as voluntary disclosure. In California, State Treasurer John Chiang requested that CalPERS and CalSTRS push companies to disclose not just gender and ethnic diversity, but also the sexual orientation of board directors as well. For U.S. publicly held companies, on average, I don’t believe most people can name two or three, let alone one LGBT board director serving on a public board. Why is that?

Keir: You hit on a very good point. First, I think there is a big focus on gender, and less service given to ethnic diversity, and zero attention given to sexual orientation—zero, whatsoever. I don’t believe we will ever get to a place where we stop talking about the lack of diversity on boards, especially from a gender perspective anytime soon. This is a yearlong, decades-long conversation, unfortunately. Frankly, if you also look at law firms or professional services organizations, the same conversation is being had in terms of gender and ethnic diversity. We will be having the conversation on improving diversity for a very long time. However, we can’t wait to talk about gender and ethnic diversity. Same thing with sexual orientation or other categories that fall behind gender. The thing with both ethnicity and gender is some might say it’s easier to determine who is a woman and who is not. Gender identity is changing a lot as well. For now, without making any vast overgeneralizations, you generally will know who identifies as a woman and who identifies as a man, and it’s not a big issue to be identified that way. Whereas with ethnic diversity and sexual orientation people have to affirmatively tell you. I have heard people say, “Well, you can put pictures up and that will show diversity,” not necessarily. There are many people who from a picture can’t tell what a person’s ethnic origin is, and from a sexual orientation perspective, pictures tell you nothing. People have to accept that we should be thinking about all of these things. Candidly, for certain industries it’s a bigger issue than others. For example, if you are a consumer goods company, it’s probably more relevant to your business to have diverse voices on your board because that’s who your customers are. But that may not be the case for other industries.

Alvin: In terms of having a well-rounded board that is a reflection of your employee base, I believe employees, especially LGBT employees would be interested in knowing if they are represented at the board level or if there are board directors who are advocates or allies. LGBT leadership should not stop at senior level management or the C-Suite, it should bubble all the way to the top. It’s very comforting to know when there is an LGBT presence in the boardroom, but the topic is very taboo. No one discusses it or to your point, zero attention is given to it. Investors are becoming very interested in this type of information, especially as sexual harassment cases continue to emerge. There has been concern that certain issues were not addressed swiftly and appropriately because of the lack of diversity at the board level. Investors now want to see a balance. What are your thoughts?

Keir: The corporate boardroom is where many of these types of things tend to change last—in terms of societal change. If some investors are focused on this type of diversity, hopefully others will follow suit, because it is an important issue. Companies are re-evaluating their corporate governance guidelines and improving their proxy statement disclosures to assess whether diversity is being appropriately addressed or if changes need to be made. In terms of sexual orientation, it is a topic that is not discussed and I am not sure why.

Alvin: Proxy statement disclosure will be very important this proxy season. One of the hot topics this season and an area investors will be focused in on is diversity. What is the best approach for companies to take in identifying diversity, for example, sexual orientation? This is a sensitive topic I am sure for most companies. I understand the sensitivities such as companies not wanting to make a board director feel singled out, or make them feel like the only reason they are on the board is because of a diversity quota, or frankly, may not want to be identified at all. However, investors want to see this information disclosed. I was happy to see Prudential Financial Inc. begin disclosing that an LGBT director existed on its board. How do you recommend companies reconcile and satisfy investors’ disclosure expectations?

Keir: My favorite type of disclosure in terms of diversity is when a company discloses diversity by percentage or by number. For example, 30% of the board are female, or 3 directors are African-American. I am not a huge fan of describing diversity in the director’s biography itself, because then it starts to feel like tokenism. Directors have voiced that they don’t want to be the token. However, there are other directors who don’t mind when a company tells them they would like for that person to join their board because they need diversity. The company would not ask that person to join its board if they did not feel the person was qualified. Nevertheless, out of respect for those individuals, it may be best not to identify that director specifically. As we begin to see a new mix of diversity emerge on corporate boards, companies will have to artfully disclose their diversity without making someone feel like the token director. In terms of finding diverse candidates, there are so many qualified candidates out there that are often overlooked or that boards don’t think about. Many companies like to fill board seats with former CEOs or former CFOs. I am not so sure a former CEO or CFO is always the better choice over other business functions. If you are an officer, in a senior role, or you have visibility into the operations of a company from a macro level, that is a useful viewpoint that could be beneficial to a board. Investors are now wanting to understand who on the board has climate expertise, technology experience, human capital experience, among other skill sets. A mix of non-CEOs might be better than a board filled with predominantly former CEOs.

Alvin: How about diversity in terms of skills?

Keir: If you expand the pie from a diversity perspective, there are going to be certain skills for certain ethnicities that you don’t see as much as others. However, if you want a qualified director with skills and experiences that are relevant to your business, there are plenty of qualified candidates out there. Companies should make an intentional effort to seek out and identify who those candidates are, and that move beyond finding a former CEO, which drastically reduces the candidate pool in terms of ethnic and gender diversity. There are many skills and experience areas that individual directors can bring to the table and the disclosure should talk about that.