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Jul 22, 2020

Rise in management discussion of racism at investor-facing events

As management teams begin discussing race and racism, compensation and proxy advisers call for greater transparency

During the last 10 years there has been a steady increase in the mentions of ‘diversity’ and ‘inclusion’ at investor-facing events, but the last six weeks have brought a massive increase in explicit discussions of race and racism, according to data from Sentieo.

Following the murder of George Floyd on May 26, many public company executives used the words ‘racism’ or ‘racial’ for the first time at investor-facing events. In June, there were 137 mentions of these words, while there have been 29 mentions in July so far – many on recent earnings calls. There were nine mentions of racism or racial in June and July 2019.

Mentions of 'diversity' and 'inclusion' between 2010-today

Source: Sentieo

‘We have seen a general increase in transcripts that mention either diversity or inclusion, or both, over the years, from around 400-500 transcripts per month during reporting peaks 10 years ago to more than 800 in the last reporting period,’ says Nick Mazing, director of research at Sentieo.

‘But over the last month and a half or so, we are seeing a spike in transcripts that explicitly address racial issues, and what companies are doing about them. We saw almost 140 transcripts in June that mention racism or racial. This is more than 10 times the prior peak of 12 mentions, back in November 2018… The issue has moved front and center.’

Mentions of 'racism' or 'racial' in 2020

Source: Sentieo

The topic of racial inequality is being addressed by public company CEOs on earnings calls on an unprecedented scale this quarter. The CEOs of Bank of America, Domino’s Pizza, Morgan Stanley, UnitedHealth and Netflix all discussed initiatives their companies are taking to address racial inequality during the prepared remarks section of their earnings calls.

‘IROs at companies with existing or planned initiatives should strongly consider having the topic covered on their upcoming calls,’ Mazing says.

ISS asks for disclosure on racial diversity

It’s likely public companies will face continued pressure to disclose and discuss their role in creating diverse companies and communities. ISS wrote to more than 4,000 public companies last week asking them to disclose the ethnicity of board directors and executive management. The letter states that only 4 percent of Russell 3000 board directors last year were black.

Last month, Aaron Bertinetti, senior vice president of research and engagement at Glass Lewis, told IR Magazine that Glass Lewis will be reviewing the key themes that emerged from proxy season, as it always does, and will be considering how it can build a policy around racial equality in the future.

According to the EY Center for Board Matters, and first reported in the Financial Times, 45 percent of Fortune 100 companies explicitly disclosed racial or ethnic diversity statistics last year, compared with just 23 percent in 2016.

In California – which enacted a statewide quota for women on boards two years ago – a state assembly member has proposed a law that would impose an ethnicity boardroom quota on US and foreign companies with their headquarters in California. The bill would require directors from underrepresented communities – African-American, Hispanic and Native American – to have three seats on a board of nine or more directors.

Linking executive compensation to diversity goals

Board director re-elections are a popular way for investors to hold companies accountable during proxy season. Executive compensation is another, and several compensation advisers are recommending that remuneration committees consider adding diversity and inclusion targets into pay packages.

In 2019, 59 companies from the S&P 500 mentioned diversity and/or inclusion in their executive compensation plans, according to analysis from Farient Advisors. When these terms were mentioned, they were often metrics for short-term incentives and bundled with other measures.

Dayna Harris, partner at Farient Advisors, tells IR Magazine that most of the references to diversity and inclusion last year were qualitative, not quantitative.

‘To date, most of these measures have been in short-term incentives and I keep wondering whether it makes more sense to put them in long-term measures,’ she says. ‘You’re talking about a big change, and baking it into a long-term incentive plan could be more sustainable.’

While Harris expects diversity and inclusion to become a more mainstream metric in executive compensation packages, she adds that it’s not likely until 2022. Next year’s executive pay discussions will likely revolve much more around the effect Covid-19 has had on revenue, shareholder return and employee safety. 

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...