Should boardrooms consider political diversity?

Apr 12, 2019
Conservative US investor files several shareholder proposals on political diversity in US boardrooms

Should corporates be more interested in ‘ideological diversity’ in the boardroom? They should, according to Justin Danhof, director of the National Center for Public Policy Research’s Free Enterprise Project (FEP), a conservative shareholder activist group, who says ‘Silicon Valley-based companies are too liberal’.

‘We’re seeking to protect investors and one area of vulnerability we see is political unanimity,’ Danhof tells IR Magazine. ‘This is becoming more and more commonplace in corporate America. We think it’s very important that companies should just consider political diversity; we’re not calling for mandates.’

Danhof says he submitted such proposals to more than a dozen companies including Apple, Salesforce.com, Amazon, CVS Health, Gap, PepsiCo, Starbucks and Facebook. FEP says in its proposal that corporates should consider adopting ‘true diversity’, which comes from ‘diversity of thought’.

Its proposal to Apple earlier this year, for example, asks the technology giant to present each board nominee’s skills, ideological perspectives and experience in a ‘chart or matrix form’. It states: ‘There is ample evidence that the company – and Silicon Valley generally – operates in ideological hegemony that eschews conservative people, thoughts and values. This ideological echo chamber can result in groupthink, which is the antithesis of diversity. This can be a major risk factor for shareholders.’

Muddying the waters

Apple disagreed and fought back on the shareholder proposal. There was a back-and-forth at the SEC, with Apple maintaining that ‘ideological perspectives are not something that are commonly understood or well defined’ and that FEP’s arguments were made ‘without merit’, as seen in documents by IR Magazine that detail FEP’s legal arguments over the proposal. But the SEC ruled against Apple’s argument and the proposal was included on the agenda for Apple’s proxy meeting.

‘Leadership comes from the top and [Apple CEO] Tim Cook, I guess, very much enjoys the liberal [environment] at Apple and doesn’t want to even consider adding conservative views to the board,’ Danhof says.

When IR Magazine approached Apple for comment on this shareholder proposal, the tech giant provided a link to its proxy statement, which contains the following justification for why it recommended its shareholders vote against the proposal: ‘The board regularly monitors the mix of skills and experience of its directors in order to assure that the board has the necessary tools to perform its oversight function effectively. The board does not seek to determine any nominee’s ideological perspectives… the board believes this proposal is unnecessary.’

Almost all (98 percent) of the company’s shareholders voted against the proposal at the proxy meeting last month.

Stephen Giove, corporate transaction and governance partner at Shearman & Sterling, says corporates shouldn’t run the risk of having the board divided into political factions, which draws on issues of political independence. He says it’s important for corporations not to get involved in politics because directors have ‘fiduciary obligations to do what’s in the best interest of the corporation and shareholders, so political bias is not supposed to be taking place in the boardroom.

‘If you start to introduce political dynamics [in organizations], it will muddy those waters. To date, political diversity has not been a published factor. In my experience it hasn’t even been an unpublished factor. [Danhof] and his organization, which is obviously very conservative-oriented, is hoping to tip the scales at corporations that are perceived to be too left-leaning. This idea is misplaced.’

Robert Lamm, who chairs the securities and corporate governance practice at law firm Gunster, says ‘the proponent is pretty well known to be a very conservative organization’, adding that the ‘proposal is actually interesting because it speaks to another aspect of diversity’.

‘If you believe diversity is a good thing – and I’ll lay my cards on the table and say that I do – it’s difficult to say, Well, I really support diversity, but not this kind of diversity,’ he explains. ‘So from that perspective, I can’t say that it’s utterly lacking in merit. But the genesis of the proposal and the goal of the proposal one can disagree with.’

Danhof says this type of diversity mandate is not new. ‘We’re asking companies to take it a step further, because there are many organizations that have demanded quota systems,’ he states.

Skills mix

But Lamm adds: ‘I’ve been in enough boardrooms to see how [diversity quotas] can play out. Ideally, having people with different backgrounds, political views, races, gender and so on generally leads to a good result. So I don’t see any harm in having a mix of political views on your board. But [FEP] is clearly specifically picking on companies based in California, Silicon Valley because it’s concerned that those boards are [too] liberal.’

Giove adds that a skills matrix is a ‘trend and a somewhat useful way to look at the board’. But board nominees’ political affiliation ‘is not useful information to shareholders,’ he says. ‘You could be a Republican and be very liberal-leaning or you could be really centrist. I mean, there’s so many shades of gray here.’

Lamm agrees and says he ‘loves the fact that [corporates] can document a director or candidate’s skills, demographics and characteristics. But there are some skills that are rather difficult to document that way, and political views are very difficult to determine. For most individuals, it’s probably a mix.’

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