Representation matters. Whether they are identifying community specific issues or inputting a variety of viewpoints, corporate leadership teams inclusive of race, ethnicity, and gender can drive positive change for business and society. That is why it is vital for companies, who influence millions of people, to address the diversity of their leadership.
Investors are demanding that companies play a more active role in combatting racial injustice and striving for gender equality. Increasing the diversity of their senior management and boards is a crucial step toward that end. Boards of directors are responsible for overseeing the company and its long-term strategy; they are legally bound to represent the interests of shareholders in executing those responsibilities. Investors have the power to elect directors every year through the proxy voting process.
Although there have been efforts to address the diversity of corporate boards, the gap in demographic representation is staggering. White individuals, who account for roughly 60% of the population, held 84% of Fortune 500 board seats in 2018.1 In 2019, white individuals made up 76% of the new director seats,2 indicating advancement toward greater board diversity but at a slow rate.
Women fared better in 2019 with 44% of new director seats being occupied by women and overall representation improving to 27% of Fortune 500 board seats, compared to 22.5% in 2018.3
Despite this progress, women of color continue to be significantly underrepresented. Women of color represented approximately 18% of the U.S. population in 2018 but made up only 4.6% of the board seats in the Fortune 500 that year.4
Board diversity is critical for success. Research shows board diversity that is inclusive of gender, race and ethnicity is correlated to stronger financial performance.5 Studies have also shown that three or more female directors establish the “critical mass” necessary to maximize the benefits of a diverse board.6 Boards that include a variety of perspectives are less prone to groupthink, more innovative,7 show improved “cultural intelligence” and are thus better positioned to address emerging and future risks and opportunities.8
At Domini, we use our voice and our vote to push for better representation on boards. We vote against some or all directors when there’s less than 40% representation of women and when there’s less than 40% representation of historically underrepresented groups when that data is available.9
We engage companies across our portfolios about the importance of diversity. And we work with organizations like The Thirty Percent Coalition and push our peers to be more ambitious in their expectations of companies.
When we engage with companies about this topic, we encourage them to:
- Make a visible commitment to diversity and report progress.
- Adopt the “Rooney Rule”10
- Cultivate an active pipeline with internal training and mentorship.
- Broaden search criteria when nominating new directors.
We have seen meaningful improvement in the companies we engage, a consistent uptick in board diversity. For example, at the 42 Japanese portfolio companies we engaged, average gender diversity improved from 9.3% to 12.6% in 2020. We have also seen continued improvement in representation in the non-Japanese companies we have engaged on diversity on boards and senior leadership. We know there is much more work to do on this front, and we are committed to driving progress.