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Are fatigue and backlash catalysts for transformative change?
By Christel Rendu de Lint
The past 10 years have seen a surge in engagement aimed at improving diversity, equity and inclusion in the corporate workplace as a response to a current reality – and indeed history – often characterised by gender, racial, ethnic and sexual homogeneity. This corporate evolution is not taking place in a vacuum – it’s a reflection of a larger societal debate on the very same issues. At present, as cited by Sarah Murray’s article, some fatigue surrounds this topic. Many ask when the discussion will finally end, and transformative action will follow. Others feel antagonised by it and a DEI “backlash” has arisen in places.
For all of us who care deeply about DEI, we must hear these voices, understand where the concerns are coming from and make sure we can properly address them. Fatigue and resistance are always part of any journey, often catalysing the change capable of propelling us to the next level. Such a jump requires listening to, and taking into account all opinions surrounding DEI.
Personally, I first and foremost see diversity as a responsibility. At its root, corporate diversity is about ensuring equity of access to opportunity, about being fair and objective in assessing all. Much more than gender, ethnicity, or sexual orientation, diversity should encompass many more factors of potential difference, such as background, age, cognitive types and physical disabilities. However, legal concerns around data disclosure often reduce the topic to a handful of specific dimensions, gender in particular. And while gender diversity is necessary, it’s not sufficient.
This is where the business case for diversity comes in. In the same way that diversified diets aid our health and diversified investments support portfolios, diversity in business teams can have a beneficial impact. Firms can capture different ways of thinking about problems and opportunities, reducing the risk of complacency and confirmation bias. This very benefit is precisely why diversity can be challenging at times – we’re all required to learn how to best interact with and integrate people different from ourselves.
In his book Range, author David Epstein speaks about the triumph of generalists in a specialised world. It’s full of thought-provoking examples in which teams of experts, including Nasa, faced challenges they were unable to address. These challenges were ultimately resolved by outsiders who made pivotal contributions through their different approaches and angles taken. This range is the real business imperative or (the potential missed) opportunity of diversity.
As an investment firm, we know how important diversity of thought is in delivering value to our clients. Consensus and homogeneity rarely make for a high-performing active investment strategy. We look for diversity among our talents, hone independence of thought – not as an end of itself, but to achieve optimal investment outcomes – and nurture active debate. Debate is in and of itself key to unlocking the power of different viewpoints.
We believe that this diversity of thought is heavily influenced by a diversity of backgrounds, which is why DEI initiatives are not only the “right thing to do”, but the smartest way forward for any business. The next generation of talent is watching what we’re doing around such initiatives, as younger generations demand and expect diversity to occupy a more prominent seat at the corporate table. This means corporations will have to see through the increasing complexity of legal and regulatory frameworks related to diversity, outlined by Murray as a rising challenge in the US specifically.
Amid the challenges, progress exists, particularly in the realm of gender diversity, which, as mentioned above, is one of the more measurable metrics. Across the EU the number of women holding leadership positions has increased to 35 per cent this year. Vontobel has made significant progress in bolstering gender diversity: 24 per cent of senior managers are women, up from 18 per cent in 2019; and half of our board of directors is comprised of women, up from 30 per cent in 2019. Behind this progress lies concerted efforts to foster female talent, including peer coaching and skill-building initiatives. While we’ve worked hard to promote an environment of inclusivity – around categories including gender, race, ethnicity and age – our next task is to deepen this progress and extend it to other aspects of DEI.
DEI is a long-term investment with a dynamic discussion. There are observable and tangible improvements that have resulted, at least in part, from the dialectic to date. However, progress is not linear. Perhaps it’s good that fatigue has set in – it means an upgrade to the conversation is overdue and we’re collectively acknowledging that. It’s natural that dialogue changes over and with the times – and this should be welcomed. Challenges and pushback are crucial to a living dialogue and history shows that this is the case whenever the needle is being moved. But because diversity is integral to sound business strategy, its importance isn’t in question.
Corporate DEI programmes: emerging legal risks
By Clare Connellan, Philip Broke, Lachlan Low, Janina Moutia-Bloom
Following the global spotlight on racial justice after the death of George Floyd in May 2020, companies face mounting scrutiny to refocus boardroom efforts on expanding corporate DEI initiatives. Many have since made significant strides in designing, enhancing and implementing DEI programmes and commitments. Against this backdrop, novel legal, reputational and shareholder activism risks are emerging, and not only in the US.
Scrutiny of DEI disclosures will accelerate due to an inevitable surge in the availability and quality of data with new regulatory requirements across jurisdictions which companies need to monitor, and include:
In the UK, the Financial Conduct Authority introduced new rules in 2022 for certain companies to include disclosures on ethnic minority and gender representation on boards.
Subject to transitional measures, Nasdaq-listed companies are now required to disclose board level diversity statistics through a board diversity matrix on an annual basis or disclose why they do not have a minimum of two diverse board members.
The EU’s Corporate Sustainability Reporting Directive will require in-scope companies to make DEI disclosures under the European Sustainability Reporting Standards. These are defined within ESRS S1 (Own Workforce), which cover over a dozen separate data points ranging from key DE&I policies and practices, targets and actions, to workforce diversity and pay equity data.
In late 2023, California also passed a diversity reporting law requiring certain “covered entities” to report on the diversity of founding members of businesses in which they invested during the previous year. Although targeted at venture capital, the law appears to be worded broadly enough to apply to many private equity funds.
The International Sustainability Standards Board has also indicated that it would research the development of DEI-specific reporting standards.
The launch of the Taskforce on Inequality and Social-related Financial Disclosures is expected in the third quarter of 2024, to develop a voluntary baseline reporting framework covering a range of DEI issues. Along with the Taskforce on Nature-related Financial Disclosures framework, the TISFD could follow in the footsteps of the Task Force on Climate-Related Financial Disclosures regime in becoming mandatory in many jurisdictions.
As well as regulatory changes, proxy advisers (such as ISS and Glass Lewis) and institutional investors (like BlackRock and Vanguard) have sought to introduce board diversity requirements or policies.
Pursuing different agendas
Using increased disclosures, anti-ESG sentiment has targeted DEI, with tactics including actual or threatened litigation, state attorney-general investigations, shareholder activism, legislation proposals and federal investigations. All create new risks for companies implementing DEI programmes, commitments and targets. Examples include the National Center for Public Policy Research’s lawsuit filed against Starbucks executives and directors in their personal capacity, and America First Legal’s civil rights complaints against several companies (eg, Alaska Airlines, Unilever), alleging that their DEI initiatives amount to discrimination. The US Supreme Court’s recent decision finding that universities may not make use of race-based admissions systems in higher education (the so-called affirmative action ruling) may embolden claimants to challenge corporate DEI initiatives. In response to the judgment, Strive Asset Management demanded that one of its portfolio companies rescind diversity targets for employees and suppliers.
Investor pressures
According to Georgeson’s Investor Voting Insights Report, 140 shareholder proposals were filed on human capital management and DEI in the US in 2023. The DEI resolutions centre around racial equity/civil rights audits, pay gap reports, reports on DEI effectiveness and inclusive hiring, racial justice, board diversity, AI equity and the decline in investment firms’ voting records on pro-DEI resolutions at portfolio companies.
Despite the broad range of shareholder proposals, it is likely that most action will take place behind the scenes, as boards seek to negotiate agreements with activists to keep proposals off the ballot or to have them withdrawn ahead of AGMs.
Board engagement
Boards should prepare for the DEI debate moving beyond shareholder proposals; extending into votes on issues such as (i) inclusion of DEI metrics in executive compensation packages (more than 75% of S&P 500 companies link executive pay to ESG metrics with increases in DEI outcomes); and (ii) elections or re-elections of directors or CEOs who have been embroiled in DEI controversies.
Consumer and employee activism
Consumer boycotts or “cancel culture” and employee demands bring new challenges. Campaigns such as Black Lives Matter, Stop Asian Hate and positive activism on behalf of the trans community have prompted changes in practices and marketing.
Mitigating legal risks
Companies at varying stages of building their DEI strategy can accelerate and enhance efforts to mitigate the legal risks with key objectives on the board’s agenda:
Assessing the company’s short- and medium-term DEI aspirations, and the roadblocks to achieving desired outcomes.
Appropriate cross-functional teams to ensure that any goals and challenges are appropriately reflected across DEI-related policies and public disclosures to mitigate the risk of allegations of “DEI-washing” or “DEI-hushing”.
Taking stock of how the company is currently placed to gather the data required to meet existing or emerging legal frameworks.
Proactively engaging with activist investors to pre-empt and mitigate the filing of resolutions.
Engaging in meaningful dialogue with internal and external stakeholders to develop the company’s DEI strategy/road map, and mitigate the risk of whistleblowing, the filing of grievances, or consumer boycotts.
Taking these steps can help companies not only mitigate risk, but can also help demonstrate both DEI progress and accountability to stakeholders and regulators. Robust data can help to inform DEI-insights, gain a better understanding of the company’s progress, and develop an appropriate and effective path forward for delivering stronger DEI outcomes for the future.