In light of the recent US Supreme Court decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, companies are taking a fresh look at their diversity, equity, and inclusion (DEI) policies and practices. While still embracing DEI as a key driver of business success, they are re-evaluating their initiatives for legal and reputational risk.
In this environment, companies should be prepared to receive shareholder proposals for the 2024 proxy season relating to “racial equity and civil rights audits,” which call for independent reviews of the impact of companies’ policies and practices on groups that have been subject to a history of discrimination. When these proposals were introduced in 2021, they were often used to test whether companies’ actions relating to equality matched the statements they issued during the social unrest of 2020. Since then, these proposals have been submitted by both sides of the debate on DEI. Even though shareholder support for these proposals dropped in 2023, they (or the next generation of them) are poised to stage a comeback in 2024. First, the Supreme Court’s decision will likely serve as a catalyst for proposals relating to DEI. And second, the shareholders who submit these proposals are often not concerned about the proposals passing but aiming to make a broader political point.
Background
While these shareholder proposals are often viewed interchangeably, “civil rights” audits are wider in scope than “racial equity” audits as they go beyond race and may include an assessment of a company’s impact on gender, sexual orientation, religion, disability, and other protected classes.
Shareholder proposals on racial equity and civil rights audits gained immediate traction in 2021, with nine proposals receiving average support of 32 percent. In the 2022 proxy season, 31 proposals received an average of 33 percent support, and six were approved by shareholders. This year, the tide turned: in the first half of 2023, 25 proposals were submitted to a vote, and support fell 19 percentage points to 14 percent. Interestingly, this decline in support isn’t due to the growing percentage of similar proposals from “anti-ESG” groups (which consistently perform poorly); such proposals usually also ask for racial equity or civil rights audits but have an antidiversity focus. In fact, when excluding such proposals, the decline in support for “mainstream” racial equity and civil rights audit proposals is even more pronounced, falling 24 percentage points from 45 percent in 2022 to 21 percent in 2023.
While support for shareholder proposals on racial equity and civil rights audits plummeted in the 2023 proxy season, companies should still be prepared to receive such proposals—from both pro-ESG and anti-ESG groups. In this era of intense polarization, proponents across the political spectrum will continue to use shareholder proposals to bring public attention to companies’ approaches to DEI.
Five Key Lessons
There are five key lessons that boards can take away from the experience with these shareholder proposals:
- Diversity, equity, and inclusion (DEI) still matter to institutional investors, but they are taking a closer look at the costs and benefits of shareholder proposals. Institutional investors have not changed their voting policies on diversity-related topics. For example, according to its 2023 Proxy Voting and Engagement Guidelines, State Street Global Advisors may vote against the nominating committee chair of boards in the Russell 3000 that are not at least 30 percent gender diverse and of boards in the Russell 1000 where the company does not disclose the gender, racial, and ethnic composition of its board. It also may vote against the compensation committee chair at companies in the S&P 500 that do not disclose their EEO-1 reports. Further, apart from shareholder proposals on racial and civil rights audits, the number of shareholder proposals on board and workplace diversity slightly increased this year with only a slight 3-point decline in support. A few factors seem to be driving investor support for shareholder proposals on racial equity and civil rights audits. Generally speaking, investors are less inclined than in the past to vote in a way that “sends a message” to companies. Instead, they are conducting a closer analysis of the specific language of the proposal and its impact on the company. With racial and civil rights proposals, investors are often finding the benefits are limited, as the resulting audit reports may not provide much meaningful information. And the costs, in both money and time (these audits can take 12-18 months), can be considerable.
- Companies may wish to consider some form of independent review, especially if they have a history of, or recent incidents involving, discrimination. One of the best arguments against a shareholder proposal calling for an audit is to be able to explain what the company is already doing to evaluate and address discrimination, whether in the employee base or more broadly among its affected stakeholders. Boards may therefore wish to encourage management to consider some form of independent review that is tailored to the company’s circumstances and advances its business goals. With proper legal guardrails, these reviews can serve valuable business purposes in assessing the impact of the company’s policies, practices, products, and/or services—including ways in which the company has successfully advanced equality of opportunity.
- If the company is considering going down the path of an independent review, it should carefully weigh the costs and benefits, as well as the process for conducting the review. Some of the potential benefits include 1) improving business practices, products, and/or services; 2) building stronger relationships with current and prospective shareholders and stakeholders; 3) viewing the company’s employment and/or other business practices through the lens of the company’s impact on various communities; and 4) reducing the chance of, or support for, more proscriptive shareholder proposals. At the same time, the drawbacks can include 1) the substantial cost, time, and other resources it takes to carry out the assessment; 2) the increased risk of being asked to repeat the audit every few years to measure progress; 3) an enhanced risk of litigation not only from those in a protected class but also from those who fall outside it based on statements the company has made about its DEI commitments; and 4) reputational risk if the company isn’t willing to implement (some of) the changes recommended by the review. In the current politically charged and legally uncertain environment, companies may opt not to act now but instead prepare in case they receive a shareholder proposal.
- No matter what course the company chooses, institutional shareholder engagement is critical. Given investors’ ongoing interest in diversity-related matters, it can be extremely helpful to keep major institutional shareholders informed about the company’s thinking. For example, if the company pursues some form of independent review, it is likely to be more targeted than the audits called for in traditional shareholder proposals. It is therefore helpful for the company to discuss its plans with major shareholders before undertaking such a review to explain its scope and solicit feedback.
- Do not ignore “anti-ESG” groups. While shareholder proposals on racial equity and civil rights audits submitted by anti-ESG groups vastly underperform their pro-ESG counterparts, they can’t be ignored. Anti-ESG groups use the submission process to get their ideas in front of boards and make headlines. In doing so, they force companies to take public stances that can trigger more anti-ESG activism. Boards should therefore be prepared for these proposals as well and encourage management to explain the business rationale for the company’s position rather than merely responding to the proposal itself. Above all, companies need to be aware that everything they say, both externally and internally, will be scrutinized by all sides in the debate over ESG and DEI.
Conclusion
Boards will want to consider how they would respond to a shareholder proposal on racial equity or civil rights audit (or similar proposal) before the company receives one. This allows for a more thoughtful approach that enables the company to engage with major institutional investors and other key stakeholders, better prepare for communications challenges, and give sufficient attention to the follow-through on the commitments it has made—or may make if it receives such a proposal.
In light of the recent US Supreme Court decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, companies are taking a fresh look at their diversity, equity, and inclusion (DEI) policies and practices. While still embracing DEI as a key driver of business success, they are re-evaluating their initiatives for legal and reputational risk.
In this environment, companies should be prepared to receive shareholder proposals for the 2024 proxy season relating to “racial equity and civil rights audits,” which call for independent reviews of the impact of companies’ policies and practices on groups that have been subject to a history of discrimination. When these proposals were introduced in 2021, they were often used to test whether companies’ actions relating to equality matched the statements they issued during the social unrest of 2020. Since then, these proposals have been submitted by both sides of the debate on DEI. Even though shareholder support for these proposals dropped in 2023, they (or the next generation of them) are poised to stage a comeback in 2024. First, the Supreme Court’s decision will likely serve as a catalyst for proposals relating to DEI. And second, the shareholders who submit these proposals are often not concerned about the proposals passing but aiming to make a broader political point.
Background
While these shareholder proposals are often viewed interchangeably, “civil rights” audits are wider in scope than “racial equity” audits as they go beyond race and may include an assessment of a company’s impact on gender, sexual orientation, religion, disability, and other protected classes.
Shareholder proposals on racial equity and civil rights audits gained immediate traction in 2021, with nine proposals receiving average support of 32 percent. In the 2022 proxy season, 31 proposals received an average of 33 percent support, and six were approved by shareholders. This year, the tide turned: in the first half of 2023, 25 proposals were submitted to a vote, and support fell 19 percentage points to 14 percent. Interestingly, this decline in support isn’t due to the growing percentage of similar proposals from “anti-ESG” groups (which consistently perform poorly); such proposals usually also ask for racial equity or civil rights audits but have an antidiversity focus. In fact, when excluding such proposals, the decline in support for “mainstream” racial equity and civil rights audit proposals is even more pronounced, falling 24 percentage points from 45 percent in 2022 to 21 percent in 2023.
While support for shareholder proposals on racial equity and civil rights audits plummeted in the 2023 proxy season, companies should still be prepared to receive such proposals—from both pro-ESG and anti-ESG groups. In this era of intense polarization, proponents across the political spectrum will continue to use shareholder proposals to bring public attention to companies’ approaches to DEI.
Five Key Lessons
There are five key lessons that boards can take away from the experience with these shareholder proposals:
- Diversity, equity, and inclusion (DEI) still matter to institutional investors, but they are taking a closer look at the costs and benefits of shareholder proposals. Institutional investors have not changed their voting policies on diversity-related topics. For example, according to its 2023 Proxy Voting and Engagement Guidelines, State Street Global Advisors may vote against the nominating committee chair of boards in the Russell 3000 that are not at least 30 percent gender diverse and of boards in the Russell 1000 where the company does not disclose the gender, racial, and ethnic composition of its board. It also may vote against the compensation committee chair at companies in the S&P 500 that do not disclose their EEO-1 reports. Further, apart from shareholder proposals on racial and civil rights audits, the number of shareholder proposals on board and workplace diversity slightly increased this year with only a slight 3-point decline in support. A few factors seem to be driving investor support for shareholder proposals on racial equity and civil rights audits. Generally speaking, investors are less inclined than in the past to vote in a way that “sends a message” to companies. Instead, they are conducting a closer analysis of the specific language of the proposal and its impact on the company. With racial and civil rights proposals, investors are often finding the benefits are limited, as the resulting audit reports may not provide much meaningful information. And the costs, in both money and time (these audits can take 12-18 months), can be considerable.
- Companies may wish to consider some form of independent review, especially if they have a history of, or recent incidents involving, discrimination. One of the best arguments against a shareholder proposal calling for an audit is to be able to explain what the company is already doing to evaluate and address discrimination, whether in the employee base or more broadly among its affected stakeholders. Boards may therefore wish to encourage management to consider some form of independent review that is tailored to the company’s circumstances and advances its business goals. With proper legal guardrails, these reviews can serve valuable business purposes in assessing the impact of the company’s policies, practices, products, and/or services—including ways in which the company has successfully advanced equality of opportunity.
- If the company is considering going down the path of an independent review, it should carefully weigh the costs and benefits, as well as the process for conducting the review. Some of the potential benefits include 1) improving business practices, products, and/or services; 2) building stronger relationships with current and prospective shareholders and stakeholders; 3) viewing the company’s employment and/or other business practices through the lens of the company’s impact on various communities; and 4) reducing the chance of, or support for, more proscriptive shareholder proposals. At the same time, the drawbacks can include 1) the substantial cost, time, and other resources it takes to carry out the assessment; 2) the increased risk of being asked to repeat the audit every few years to measure progress; 3) an enhanced risk of litigation not only from those in a protected class but also from those who fall outside it based on statements the company has made about its DEI commitments; and 4) reputational risk if the company isn’t willing to implement (some of) the changes recommended by the review. In the current politically charged and legally uncertain environment, companies may opt not to act now but instead prepare in case they receive a shareholder proposal.
- No matter what course the company chooses, institutional shareholder engagement is critical. Given investors’ ongoing interest in diversity-related matters, it can be extremely helpful to keep major institutional shareholders informed about the company’s thinking. For example, if the company pursues some form of independent review, it is likely to be more targeted than the audits called for in traditional shareholder proposals. It is therefore helpful for the company to discuss its plans with major shareholders before undertaking such a review to explain its scope and solicit feedback.
- Do not ignore “anti-ESG” groups. While shareholder proposals on racial equity and civil rights audits submitted by anti-ESG groups vastly underperform their pro-ESG counterparts, they can’t be ignored. Anti-ESG groups use the submission process to get their ideas in front of boards and make headlines. In doing so, they force companies to take public stances that can trigger more anti-ESG activism. Boards should therefore be prepared for these proposals as well and encourage management to explain the business rationale for the company’s position rather than merely responding to the proposal itself. Above all, companies need to be aware that everything they say, both externally and internally, will be scrutinized by all sides in the debate over ESG and DEI.
Conclusion
Boards will want to consider how they would respond to a shareholder proposal on racial equity or civil rights audit (or similar proposal) before the company receives one. This allows for a more thoughtful approach that enables the company to engage with major institutional investors and other key stakeholders, better prepare for communications challenges, and give sufficient attention to the follow-through on the commitments it has made—or may make if it receives such a proposal.
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