& Securities

In the latest generation of the Boardroom Accountability Project, the Office of the New York City Comptroller (the “NYC Comptroller”) has sent a letter to 56 S&P 500 companies that they found do not disclose in their proxy statements that they have a diversity search policy that includes “Rooney Rule” language addressing gender and racial diversity for the selection of both directors and the CEO. The “Rooney Rule,” which is a policy of the National Football League (NFL), requires football teams to, among other things, interview minority candidates for head coach, general manager jobs and equivalent front office positions.

Citing a range of statistics supporting diversity in the oversight and management of organizations, the letter requests that boards adopt a diversity search policy that would require the initial lists of management-supported director nominees and CEO candidates to include qualified female and racially or ethnically diverse candidates from non-traditional fields, such as government, academia and not-for-profit sectors. The letter also cites favorably seven S&P 500 companies that have instituted similar policies for board searches, indicating that the adoption of such policies often was in response to engagement from institutional shareholders.

In its announcement of the letter-writing campaign, available here, the NYC Comptroller touted that the campaign marked the first time a large institutional investor has pushed for a diversity search policy for CEOs in addition to directors. The NYC Comptroller also stated its intention to file shareholder proposals for the upcoming proxy season at companies with a lack of apparent racial diversity at the highest levels.

The NYC Comptroller also announced that in 2019 NYC Retirement Systems revised its voting policy to provide that it may vote against the election of members of a board’s nominating committee if “the board lacks meaningful gender and racial/ethnic diversity, including but not limited to any board on which more than 80% of the directors are the same gender.”

What to Do Now:

• For the 2020 proxy season, as investors maintain their focus on board composition, be prepared to be challenged, including through a shareholder proposal, if your board is not meaningfully diverse.
• Be aware of the increasing focus on diversity among senior management in addition to the board, and the possibility of receiving a shareholder proposal that also relates to diversity of senior management, or at least a diversity search policy relating to CEOs. In that regard, for purposes of its QualityScore, ISS evaluates whether companies have women as named executive officers as well as whether companies have women on the board and in board leadership positions. Companies with no women as named executive officers lose credit from the Board Structure Category of their QualityScore.
• Consider your company’s potential responses to a diversity search policy shareholder proposal, which could range from not making any changes to adopting a “Rooney Rule” policy for director and CEO positions.
• Be aware of the voting policies of key shareholders and proxy advisory firms on diversity in respect of director elections as well as shareholder proposals, especially for purposes of shareholder engagement.
• Review your current, or consider whether it would be appropriate to establish a new, diversity search policy taking into consideration the company’s existing diversity hiring policies and other commitments, if any, as well as any related public disclosure. We note that the NYC Comptroller to date has only cited examples of companies that have adopted diversity search policies for directors and none for CEOs, as it initiates the push for diversity at the senior management level.
• Consider the SEC’s recent guidance regarding disclosure of the self-identification by directors of diverse characteristics as discussed here.