Pride Month Spotlight on Corporate Diversity Efforts

June marks Pride Month in the U.S. and locations around the world—a month dedicated to recognizing the advancements made for LGBTQ+ rights and representation. As such, this as an opportune time to analyze progress on representation at various levels: What is the status of LGBTQ+ diversity at the leadership level of corporations? How does that compare to broader efforts of workforce diversity? How are companies tying executive pay to diversity, equity, and inclusion (DEI) efforts? And how has the polarization in politics particularly on social issues affected the advancement of DEI causes?

Improved LGBTQ+ Diversity

Corporate boards have made major advancements in LGBTQ+ policies and representation in recent years, according to a recent report by Out Leadership, an LGBTQ+ advocacy organization. An estimated 22% of Fortune 500 companies now have LGBTQ+ inclusive board policies, up from just 2% the year prior. Among the Fortune 500, 39 companies (7%) have at least one openly identified LGBTQ+ director, which represents a 50% increase since 2022.

The Nasdaq stock exchange is heavily credited with the rapid adoption of LGBTQ+ inclusive board policies., It was Nasdaq’s 2021 rule that required companies to diversify their boards, including recognition of LGBTQ+ candidates. The Nasdaq rule requires companies listed on its exchange to include at least one woman and one minority or LGBTQ member on their board or explain the lack of diversity.

Heightened Expectations

The Nasdaq rule and others from proxy advisors and state regulators (e.g., California whose board diversity regulations have since been struck down by state courts) have propelled a significant jump in board diversity in terms of female, ethnic, and LGBTQ+ representation. To that end, a recent Institutional Shareholder Services (ISS) study highlights that for the first time in 2023, minority directors now occupy more than 20% of board seats among Russell 3000 companies. In fact, African Americans have made the biggest gains, now representing 8% of board seats in 2023, up from 4% in 2019.

The business case for increasing diversity is well-justified. In addition to the important culture-enhancing benefit of supporting DEI, more companies recognize that a diverse and inclusive leadership team and workforce produces better performance. According to State Street, which has its own set of guidelines on diversity for its portfolio companies, “research suggests that diversity can drive returns, and that companies that neglect this topic face risks to their reputation, productivity, and overall performance.”

Other investors have also adopted diversity policies. BlackRock, for instance, expects companies to sufficiently disclose board composition and quality, including their approach to board diversity, or it may vote against the committee chair. Additionally, Vanguard notes in its stewardship policies that it expects companies to be recruiting, promoting, and retaining diverse talent across all levels of the organization.

DEI Measures in Incentive Plans

Investors continue to focus heavily on social issues, primarily workforce diversity, which has driven up the use of DEI measures in incentive plans. In prior years, investor pressure focused on disclosure, pushing companies to publish their diversity metrics. But now, while the pressure on disclosure remains, expectations exist for companies to demonstrate progress on their gender, racial/ethnic, and LGBTQ+ diversity, particularly for those companies that may be lagging relative to others in their industry.

Globally, 60% of companies using social measures in incentives focus on diversity, up 15 percentage points from last year. In the U.S., 38% of S&P 500 companies now tie a portion of executive incentives to DEI measures.

Source: 2023 Global Trends in Stakeholder Incentives: The Staying Power of ESG

 

Companies adopt DEI measures using a variety of metric types and often target one or multiple demographic groups. One broad and recent trend is an increasing quantification of DEI ambitions. Of S&P 500 companies using DEI measures, an estimated 57% now use quantitative measures.

 

Farient Point of View

Despite backlash to corporate ESG and DEI efforts and recent regressive actions on LGBTQ+ rights in certain U.S. states, most corporations continue to recognize the value of diverse leadership and a diverse workforce. Quite simply, companies able to harness the opportunities of an increasingly diverse talent pool and customer base will be better equipped to succeed.

We expect incentives tied to diversity efforts to maintain a high degree of prevalence in executive compensation programs, as companies work to demonstrate progress on their DEI strategies.

Nevertheless, challenges remain: It can be difficult to set realistic goals and make sufficient progress when the diverse talent pipeline is not sufficiently wide, particularly in certain industries. Most companies with DEI strategies recognize that improving diversity can be a long game, requiring not just recruiting efforts; companies also need to make investments in engaging and retaining existing talent, which should include addressing issues of bias and discrimination, and expanding the pool of potential candidates through support for diversity organizations, such as historically black colleges and universities, and investing in local communities.

Diversity proponents continue to advance DEI objectives despite a polarized political climate and efforts in some states to roll back progress. There are now more than 250 anti-LGBTQ bills in at least 37 states, according to the LGBTQ legislative tracker Human Rights Campaign. This Pride Month those corporations working to improve gender, ethnic, or LGBTQ+ diversity should stand proud of their efforts.

By Brian Bueno

 

About Brian Bueno

ESG Practice Leader, Farient Advisors/GECN Group, New York

New York
(646) 626-6929
brian.bueno@farient.com

Brian Bueno is the ESG Leader at Farient Advisors. In this role, Brian guides the firm’s strategy, research, and analysis on environmental, social, and corporate governance (ESG) matters. Brian focuses on the ESG landscape and its intersection with executive compensation and incentives in order to assist clients in understanding stakeholder considerations and developing and implementing appropriate programs that help create stakeholder value.

Prior to re-joining Farient in 2022, Brian was vice president and product manager at Institutional Shareholder Services (ISS), a leading proxy advisory firm, where he led the development of solutions that assist institutional investors evaluate executive compensation and related areas at their portfolio companies across global markets. Additionally, at ISS’s Corporate Solutions arm, Brian led the creation and management of product platforms that allow companies to benchmark themselves across executive compensation and ESG topics.

Prior to joining ISS in 2015, Brian worked at Farient where he managed the development and delivery of Farient’s Performance Alignment Reports and associated research, including analyses on executive pay definitions and financial performance metrics and their link to shareholder value. At Farient, Brian also worked with clients across various industries, including energy, industrials, banking, and insurance. And before Farient, Brian held a market research role involved in identifying opportunities and risks in particular industries and communicating findings to clients and media.

Brian holds a BS from the University of Southern California’s (USC) Marshall School of Business with a triple concentration in finance, marketing, and entrepreneurship.

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