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Jun 17, 2021

Investor groups probing issuers on racial equity messaging this proxy season

How some investors are pressing US companies to take racial equity issues seriously – and the responses they are getting

As thousands of people took to the streets last summer to protest the deaths of George Floyd and other black Americans at the hands of police officers – alongside the disproportionate impact of the Covid-19 pandemic on communities of color – powerful chief executives made statements of support and pledged millions of dollars in assistance.

And some investors took a fresh look at how they might hold those CEOs and their companies accountable for their promises and progress on diversity and inclusion. During this year’s proxy season, such accountability has become more tangible through shareholder proposals and votes, engagement and disclosures.

The extent of the change is stark. The Sustainable Investments Institute (Si2) reports that 28 shareholder proposals dealing with racial justice had been filed as of April 27, compared with a total of none across at least the previous nine years. The number of proposals asking firms to release EEO-1 reports, which include demographic workforce data, rose from 19 in 2020 to 52 this year (up to April 27). Proposals on general or minority pay gaps and on board diversity have dropped this year, according to data from Si2, perhaps reflecting a switch in approach.

Arguably the most important development among shareholder proposals has been the emergence of requests that companies conduct racial equity audits, ideally using a third party. Some companies have objected – but not all of them. And the proposals are gaining significant levels of investor support, even if none has secured a majority at time of writing.

The CtW Investment Group, working alongside the Service Employees International Union (SEIU), has been a prime mover with this concept. The group and the SEIU between them have filed proposals at eight major financial institutions this proxy season: Bank of America, BlackRock, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp and Wells Fargo.

Tejal Patel, corporate governance director with CtW Investment Group, describes racial equity audits as ‘a novel approach to an important societal issue’ that goes beyond the usual disclosure model for such proposals. Others on the investor side express similar views. Olivia Knight, racial justice initiative manager with As You Sow, calls the audit proposals ‘a step up’ from proposals simply seeking disclosure. ‘It’s taking a step beyond,’ agrees Marvin Owens, chief engagement officer with Impact Shares and former senior director of economic development at the NAACP.

Patel tells IR Magazine that the events of last summer inspired CtW Investment Group to refine what it was looking for from companies, and that it was inspired by Starbucks, Facebook and Airbnb having conducted similar audits. Her group looked to major financial services firms because they are both systemically important to the economy and play key roles in communities of color through their potential to help create wealth, she says.

Those companies in the past year have made statements, pledges and a lot of disclosures, Patel notes. ‘[But] what we’re trying to get at is the effectiveness of these commitments,’ she says, as well as have a holistic review. Companies need to make sure the money they are spending is going to the right places, she adds. The CtW Investment Group also wants companies to engage with stakeholders – such as employees and civil rights groups – that have insight into the relevant issues and that, for example, might be able to advise on occasions where a well-intentioned initiative could have negative unintended effects, Patel explains.

Getting to the proxy statement
Bank of America is one of the few companies at time of writing to have had a racial equity proposal reach a vote at its AGM. In its proposal, the CtW Investment Group urges the board to ‘oversee a racial equity audit analyzing [Bank of America’s] adverse impacts on non-white stakeholders and communities of color.

'Input from civil rights organizations, employees and customers should be considered in determining the specific matters to be analyzed. A report on the audit… should be publicly disclosed on [Bank of America’s] website.’

In its supporting statement, CtW Investment Group says: ‘A racial equity audit will help [Bank of America] identify, prioritize, remedy and avoid adverse impacts on non-white stakeholders and communities of color. We urge [Bank of America] to assess its behavior through a racial equity lens in order to obtain a complete picture of how it contributes to, and could help dismantle, systemic racism.’

In the company’s proxy statement, the board urges shareholders to vote against the proposal, stating: ‘We believe our actions and focus in making progress on the issue of racial equality, and reporting on our progress regularly, render the proposal’s requested audit unnecessary.’ It further asserts that Bank of America is ‘committed to making certain that our policies, practices, products and programs align to advance the company’s purpose of making our customers’ financial lives better.’

Among other things, it states that ‘our board and ESG committee are actively engaged in the oversight of our ESG programs and strengthening our ESG practices to support responsible growth’ and that ‘integral to sustainable, responsible growth is sharing our success with the communities in which we operate, which we do through ESG leadership, including taking action to drive progress on racial and economic inequality in the [US].’

Lee McEntire, IR executive with Bank of America, tells IR Magazine that this proposal attracted the most investor interest during engagement this proxy season, and that investors were concerned by its ‘broadness’. The bank was also unclear what the CtW Investment Group wanted to achieve, he adds. He notes that the bank has released human capital reports in the past two years and argues that having a third party conduct an audit would be a distraction to those employees at Bank of America who are preparing such disclosures.

Ultimately, the proposal was backed by 26 percent of votes cast at the AGM, a level of support that is often cited by governance professionals as significant, particularly the first time a proposal is voted on. McEntire welcomes the level of support received by the company. Patel also welcomes the outcome, saying it demonstrates that shareholders will be asking for such actions in the future.

Johnson & Johnson received a similar proposal this year, filed by Trillium Asset Management. It requests that the company ‘conduct and publish a third-party audit… to review its corporate policies, practices, products and services, above and beyond legal and regulatory matters; to assess the racial impact of the company’s policies, practices, products and services; and to provide recommendations for improving the company’s racial impact.’

Johnson & Johnson unsuccessfully requested no-action relief from the SEC for excluding the proposal. It argues this in part on the basis that the firm ‘has substantially implemented the proposal’. For example, it writes that it already publishes information on ‘its assessment of the ways that it has been working, and is continuing to work, to promote diversity, equity and inclusion both within and outside the company, including promoting racial and social justice.’

It also provides details of its ‘You belong: diversity, equity & inclusion impact review’, which explains how Johnson & Johnson approaches such matters and how that is reflected in company policies, practices and initiatives. Among other things, it states that the impact review looks at ways the company ‘has approached products and services in order to promote racial equity.’

The proposal received the support of 34 percent of votes cast at its AGM. Susan Baker, director of shareholder advocacy at Trillium, comments: ‘This is a very high vote for a first-year issue and underscores the importance of the topic for [Johnson & Johnson]. We strongly believe it should move forward with conducting the audit.’

Johnson & Johnson did not respond to requests for comment.

This is an extract of an article that was published in the Summer 2021 issue of IR Magazine. Click here to read the full article.

Ben Maiden

Ben Maiden is the editor-at-large of Corporate Secretary , an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter , covering regulatory and compliance...
Editor-at-large, Corporate Secretary