Even the Best Leaders Need Diverse Oversight

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It is in the best interest of shareholders for companies to evaluate their board composition regularly, establish policies and processes to ensure board diversity, and disclose the composition of their boards of directors, write Michael Frerichs and John W. Rogers, Jr.

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About the authors: Michael Frerichs is the Illinois state treasurer. John W. Rogers, Jr. is Co-CEO of Ariel Investments and a board member of McDonald’s, Nike and the New York Times.

Leadership matters. But even the best leaders need advice, counsel and—let’s face it—oversight from a diverse range of viewpoints.

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Oversight of US businesses falls to boards of directors. The directors hire the CEO, evaluate performance and help set a vision for the corporation. They enforce governance practices vital to the company’s integrity and performance, ensure the cultivation of an inclusive workplace, and guide that workplace toward sustainable growth. To be effective in these tasks, boards must be made up of accomplished people—and they must be diverse.

Diverse leadership helps companies better understand their customers, attract the best talent, and make smarter business decisions. A 2020 McKinsey study found that companies with the most ethnically diverse leadership teams were 36% more likely to experience higher profits and found a substantial performance differential—48%—between the most and least gender-diverse companies.

Institutional investors like the Office of the Illinois State Treasurer and Ariel Investments want companies to be increasingly transparent on progress in corporate governance—and that includes board diversity. But currently, federal law imposes no requirement on companies to report publicly or in an accessible way how diverse their boards are. A handful of states—Illinois among them—impose disclosure requirements. But a few state laws are not enough.

In today’s connected world, investors, employees, and customers are increasingly holding corporations accountable for their professed commitments to diversity. However, they lack access to standardized diversity data. While some companies, including IDEX Corporation and Crown Castle Internationalprovide robust disclosure on board composition and diversity practices, far too many companies provide ambiguous information or none at all.

Companies often set targets for business priorities and refer to diversity as a “strategic imperative” on websites and in annual reports. But it is impossible to measure their progress without data. Diversity goals should be held to the same data-driven standards that shareholders require for companies to meet earnings guidance each quarter, or execute on a financial plan.

Therefore, it is in the best interest of shareholders for companies to, first, evaluate their board composition regularly, second establish policies and processes to ensure board diversity, and third, disclose the composition of their boards of directors.

What gets measured, gets done. In Illinois, we are already seeing the impact of disclosure on board diversity. Following the passage of legislation requiring transparency in the racial and gender makeup of boards of companies headquartered in Illinois, over 100 companies disclosed diversity data in 2021, and companies including Groupon, Walgreens, and others have added talented diverse directors.

Our respective organizations have partnered to encourage better disclosure and increased board diversity. In October 2020, the Illinois Treasury launched a coalition of 26 investor organizationsincluding Ariel Investments, with over $3 trillion in assets calling on all companies in the Russell 3000 index to disclose the makeup of their boards of directors.

Our teams have started this work already at a regional level. The Illinois Treasury leads the Midwest Investors Diversity Initiative, an alliance of institutional investors whose work centers on companies headquartered in the Midwest. MIDI engages local companies and works with company leaders to adopt best practices and increase disclosure. To date, MIDI’s work has led to 95 diverse leaders receiving board appointments and 50 companies adopting a diverse search policy.

A growing coalition of financial institutions, state policymakers, and other market participants are engaged in this issue. Proxy advisors including ISS and Glass Lewis now consider diversity when making board recommendations. We were also encouraged that the Securities and Exchange Commission approved Nasdaq’s board diversity rulerequiring listed companies to disclose diversity statistics or explain their failure to do so.

But federal legislation is needed. Congress should enact HR 1277, which would require all US companies to disclose the diversity of their boards. There is much work to be done. As institutional investors, we are committed to raising our voices in support of business diversity.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [email protected]

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