A bold proposal by the Nasdaq stock exchange early this month may give U.S. corporate boards the biggest nudge yet to seat diverse directors increasingly seen as key to both good business and social justice as investors across industries focus more on melding the two.
For decades, 57-year-old white men (on average), often without term limits presided over “male, pale and stale” boards. That’s been changing. Boards have slowly opened to women. A social justice awakening last summer promises more opportunity for minorities. And the global pandemic may have cracked the idea of boards wide open, forcing companies in entertainment and elsewhere to rethink businesses and seek directors with a diversity of age, thought and experience. Movement on boards will be a big thing to watch for in 2021.
“The board is the heart of an organization. … I think we have a window of opportunity right now. We have gotten here through some painful change,” said Charlotte Laurent-Ottomane, executive director of the Thirty Percent Coalition, which works with big institutional investors and companies on board diversity, especially women on boards.
Boards have “evolved a lot in terms of opening the doors, especially this year,” she said. The goal is to look beyond “an older white male who has been the CEO of something, to someone who has had hands-on experience — in cybersecurity, or international sales or building a consumer brand. With Covid-19, “Companies had to assess this unusual market situation. They may not have been agile enough.”
In December, Roku named two women, Laurie Simon Hodrick and Gina Luna, former financial executives, to its board. Netflix named Strive Masiyiwa, a global tech and telecom investor originally from Zimbabwe to its board, and Discovery named BET co-founder Robert Johnson. In November, AT&T appointed a current director, former FCC chairman William Kennard, to chairman of its board starting in January. In late summer, Lionsgate named former FCC commissioner Mignon Clyburn as its fourth woman and second diverse director.
Among the big players, ViacomCBS is near the top of national and international diversity rankings with seven women directors out of 13 – a rare majority female board led by Shari Redstone – and two diverse directors. Advertising goliath Omnicom has six women on its nine-member board. Small Phoenix-based cable company Cable One has six women out of 11. Walt Disney and Comcast are, respectively, 60% and 50% diverse by gender and race.
On the other end, Discovery’s 12-member board has one woman and will have one diverse director when Johnson starts January 1. AMC Networks has a 12-member board with two women, both connected with the Dolan family that controls the company, and no diverse directors.
Generally, media and entertainment “is right in the middle” — “far from the worst, but not the best,” said Ric Marshall, executive director at MSCI ESG Research, which provides data for socially responsible investing. It’s not a high bar, but no company in the sector has zero women and only a few have just one, he said. (“You need at least two — one to make the motion, one to second the motion,” according to Nell Minnow, corporate governance expert and vice chair of ESG consultant ValueEdge Advisors.)
The challenge these experts face in tallying board stats or advising big investors is the lack of disclosure on board diversity. Googling director photos and bios or calling a company directly to confirm whether a director identifies as, say, Hispanic or Asian or Native American isn’t ideal. It’s something Nasdaq’s landmark December 1 proposal wants to change by basically creating the first diversity database for easy reference. The rule would require the exchange’s circa 2,700 listed companies to actively disclose board diversity figures and over the course of several years name at least one director who self-identifies as a woman and one who self-identifies as an underrepresented minority, or to explain publicly why they can’t.
“The idea is that by having to at least have a rationale, it increases the likelihood that they do it. It’s easier to do than to make up a reason why you didn’t, and it’s certainly less embarrassing,” Marshall said.
“Once they start disclosing the process, they will want it to look good,” agreed Laurent-Ottomane. “We have been calling for years for disclosure of board composition.”
Laurent-Ottomane sees opportunity in the national soul searching after the police killing of George Floyd in May sparked months of protest. It “opened another window where it’s like, ‘How can you not have a person of color on your board?’ ” she said. After MeToo, she said, “Investors wanted to see policies against discrimination and sexual harassment that resulted in companies tightening up their practices.”
The Securities & Exchange Commission, which regulates U.S. securities markets, must approve the proposal and has opened it to a public comment period. Advocates think it has a good chance of passing sometime next year under a Biden administration. ESG investing, which weighs a company’s environmental, social and corporate governance profile alongside its financial performance, is, after all, the fastest growing investment trend globally.
Companies in Europe, led by Norway two decades ago, have had mandatory quotas for female directors for years. In the U.S., California was first state to require in 2018 that public companies based there add female directors and a handful of other states followed. Earlier this year, Gov. Gavin Newsom expanded the directive to make California the first state to requires a board member from an underrepresented community. The state mandate is tougher than Nasdaq’s. Its representation requirement rises more sharply over time based on board size and companies can’t get out of hefty fines by explaining why they missed the target.
Nasdaq would require board diversity disclosure through a new framework within a year of its proposal being approval by the SEC. Companies would have a year after that to name their first diverse director and two more years to name the second, with exceptions if a company is small or foreign. It defines an underrepresented minority as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or LGBTQ+.
This way information would come directly from companies, from their board members who willingly self-identify, so there’s no guessing. “We’ve struggled with this for years. Directors with Latino-sounding names ended up being from Eastern Europe. Some native Asians have westernized names, so you can’t tell from a name,” said Marshall. Identifying an LGBTQ+ should certainly come from that person and the company directly.
Board members can of course always choose not to self-identify and company could use that to explain why it has not met its target. “They can say, ‘We don’t believe it’s appropriate to disclose those factors about our board.’ [Then] the investment community and the company’s stakeholders, customers and vendors can decide,” said Jeff Thomas, Nasdaq head of U.S. listings for the Western Region, based in San Francisco.
“There can be a lot of good reasons,” he said. “A company may have a female board member who retired and they are in the process of replacing her.” Or a small biotech firm may have a board of three leading scientists in development phase, but plan to expand when it’s time to go commercial.
“It’s not a one-size fits all,” Thomas said. “We will pass no judgment on the explanation.”
The purpose “is to champion inclusive growth and prosperity to power stronger economies,” said Nasdaq CEO Adena Friedman when the exchange released the proposal with an analysis of over two dozen studies that showed a correlation between diverse boards and better financial performance and corporate governance.
Most but not all entertainment and tech companies are Nasdaq-listed. A few like Disney and Lionsgate trade on the New York Stock Exchange, Nasdaq’s larger rival, which has not proposed anything similar and doesn’t seem likely too. NYSE did set up a Board Diversity Council 18 months ago to help boards find diverse candidates (which Nasdaq also does). NYSE president Stacey Cunningham in a recent interview on Bloomberg TV said, “The data is clear that businesses perform better when there is more diversity on their boards” but that she’s against “dictating quotas.”
Influential shareholder proxy advisor ISS in October issued new standards for board diversity for companies in the Russell 3000 and S&P 500 indexes for annual meetings starting in February 2022. The firm, which advises institutional investors how to vote at annual meetings, now recommends a vote against or withholding a vote from the chair of a board’s nominating committee when the board has no apparent racially or ethnically diverse members. (Proxies are fat year-end SEC filings that list what, and whom, is up for vote at the annual meeting including the slate of directors.)
According to an October study by Matteo Tonello, managing director at The Conference Board, a nonprofit that looks at business and society, while proxy statements sometimes include photographs of directors, only about 10% of S&P 500 companies explicitly disclose individual directors’ ethnicity, and 8 out of 10 of those board members are white, even though the nonwhite population is about 40% of the total U.S. population.
Finding and nominating new directors is the task of every board’s nominating committee, usually made up of several directors. For that reason and because it’s a sensitive issue most companies contacted declined to comment on board diversity beyond indicating passages in proxies or statements by CEOs or board members emphasizing a commitment to the issue. They pointed to Diversity, Equity & Inclusion officers or stats, ESG reports and corporate social justice initiatives. These are separate from the board but also important indicators and increasingly prominent on corporate websites.
Board laggard AMC Networks on November 30 announced its first Chief Diversity, Equity and Inclusion Officer, Aisha Thomas-Petit, and cites progress diversifying senior leadership, including Miguel Penella, in charge of all SVOD services and Black executive Brett Dismuke (head of UMC and We tv). Linda Schupack oversees marketing across linear channels and SVOD and Arianna Bocco is president of IFC Films. AMC committed to help fund AFI’s new Black Production Fund.
Discovery chairman Robert Miron told shareholders at the last annual meeting that the board “does acknowledge and agree that there is a great benefit provided by diversity throughout the company, and we could do more to enhance diversity at the Board level.” He said the board engaged a director search firm to help it develop a diverse slate of potential candidates.
Fox Corp, whose board of seven includes just one woman and one diverse director, offers workplace diversity data in a 2020 Corporate Social Responsibility report showing 40% of its U.S. full-time workforce this year identifies as female and 32% as persons of color. It said 45% of hires in 2019 were female and 35% persons of color; 47% of managers were female and 33% persons of color; and 50% of promotions were of female employees.
“Diversity on the board is very important to indicate to existing and prospective employees that they have potential in that organization. But the board’s job is high level oversight,” said Meredith Benton, principal and founder of Whistle Stop Capital and head of the workplace equity program at corporate governance nonprofit As You Sow. She’s looking for more data on “recruitment, retention and promotion, which companies are only in the early stages of releasing.”
Here is the board makeup at the leading entertainment companies, from most diverse to least:
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