We welcome Matthew Fust as a returning guest columnist this week. Formerly Chief Financial Officer at Onyx Pharmaceuticals and other biopharmaceutical companies, he now serves as a board member, company adviser and as senior advisor to Quorum, which advocates for LGBT+ representation on corporate boards.
Corporate board diversity efforts continued to gain prominence during 2018's annual stockholder meeting season, and a proxy initiative led by investors at Amazon moved board diversity policies out of the rarefied world of board governance experts and into mainstream conversation and media coverage.
Institutional investors CTW and the SEIU Pension Plans Master Trust filed a shareholder proposal for Amazon's May 30 stockholder meeting, which would have required that the list of candidates from which new director nominees are chosen include qualified women and minority candidates.
The proposal was a corporate version of the Rooney Rule, a policy established by the National Football League in 2003. The rule requires NFL teams to interview at least one ethnic-minority candidate when filling head coaching and other senior roles (though it doesn't set a quota for minority hiring). It is credited with advancing leadership diversity and changing culture in the NFL (although some recent research argues that including only a single minority candidate in a selection pool may be insufficient.)
The shareholder proposal in Amazon's proxy noted that policies requiring diverse board candidate pools have been adopted by companies including Costco Wholesale, Gentex, Home Depot, IDEXX Labs, Stryker Corporation and (ironically) Whole Foods Market, now owned by Amazon. And numerous companies have embraced versions of the Rooney Rule in their employee hiring efforts, including Facebook.
In its proxy statement, Amazon's board recommended a vote against the shareholder resolution, noting "[g]iven our commitment to equality and the nature of our business, the Board believes that adoption of the policy requested by the proposal would not be an effective and prudent use of the Company's time and resources."
The company seemed to be following Apple's lead: In 2017, Apple shareholder Tony Maldonado, alongside Zevin Asset Management, submitted a proposal asking Apple to "adopt an accelerated recruitment policy" to increase diversity in its senior ranks. Apple encouraged shareholders to reject the proposal, saying that its efforts were already broader than the 'accelerated recruitment policy'. Shareholders listened and, for the second year in a row, rejected the proposal.
In Amazon's case, however, the proposal never even came to a shareholder vote. That's because-unlike Apple-opposition to the Amazon board's position gained traction among stakeholders in the weeks after the proxy was filed with the SEC in mid-April:
- Institutional Shareholder Services, an influential stockholder advisory service, which noted in its Amazon proxy voting recommendation "[g]iven that [the Amazon] board's current composition makes it an outlier among its industry peers, shareholders would benefit from having the board adopt a policy to ensure diverse candidates,"
- Employees, who-according to an internal email thread reported on by Recode-questioned Amazon's director selection policy and the Board's defense,
- And even members of the Congressional Black Caucus and Congressional Hispanic Caucus, who sent letters to Amazon encouraging adoption of the Rooney Rule policy, and who have been critical about the lack of diversity in tech company employment.
And despite subsequent withdrawal of the shareholder resolution by its sponsors, the topic of board diversity sparked comments during Q&A at Amazon's May 30 stockholder meeting.
What's the significance of this episode?
Amazon is hardly the worst diversity offender in corporate America; its ten-member board includes three women, although has no self-identified members of racial or ethnic minority groups or LGBTQ directors. (Unlike some other publicly-traded companies, Amazon's proxy does not include a board matrix or other format for directors to self-identify their diversity affiliations.) And the board's defense of its prior policy noted that Amazon's corporate governance guidelines directed the nominating committee to seek candidates "with a diversity of experience and perspectives, including diversity with respect to race, gender, geography, and areas of expertise."
Support for the shareholder resolution from a major investor advisory service was also significant, and may reflect the growing influence of "mainstream" institutional investors who are focusing on boardroom diversity
However, like other tech companies, Amazon has not been successful in building a diverse leadership team, with only one woman and no people of color among its eighteen highest-ranking executives. All of the seventeen companies Amazon cited as peers have at least one board member who is a person of color, and ten have at least three directors of color.
Support for the shareholder resolution from a major investor advisory service was also significant, and may reflect the growing influence of "mainstream" institutional investors who are focusing on boardroom diversity, as noted in Jane Howze's Taglines blog posting from the recent Milken Institute conference. Investment managers like BlackRock and State Street Global have begun taking substantive steps to advance board diversity, including voting against director nominees at companies with insufficient board diversity.
With activist investors likely encouraged by the outcome at Amazon, and with institutional investors voting for board diversity, directors and executives should take note of this topic before the next proxy season. Here are some specific approaches:
- Review and update director selection language in your company's annual proxy statement and corporate guidelines, possibly including a "Rooney Rule" or similar provision,
- Accurately capture and report on board demographics, perhaps through matrix or other presentations in proxy statements, and
- Engage with stockholders (and other stakeholders) well in advance of the annual proxy season, to educate them on your company's board diversity efforts.
With a nod to the NFL - on this important topic, why play defense?