The current racial justice movement has created an environment in which corporations and other organizations are under pressure to reconsider and address their diversity and inclusion practices. Organizations that lack racial diversity in their corporate leadership – particularly on their boards of directors – have come in for increasing criticism and, as I have noted on this blog (most recently here), the possibility of board diversity litigation. In addition, beyond the scrutiny and litigation, the California legislature has passed a bill that would require publicly traded companies in the state to have at least one director from a minority community by the close of 2021.
It now appears that as a result of both the scrutiny, the legislation, and perhaps even because of the litigation threat, a number of companies have proactively taken steps to address these issues by pleading to add a Black director to their boards within a year.
As discussed in a September 9, 2020 Wall Street Journal article entitled “Zillow, Nextdoor and Other Companies Pledge to Add Black Directors” (here), a number of public and private companies have committed to adding a Black director to their boards within the next year. The Journal article explains that these companies and others accepted the Board Challenge, a pledge for boards to add a Black director within a year.
As discussed in this September 9, 2020 Black Enterprise article (here), the Board Challenge is an effort launched by Altimeter Capital, Valence and the Boardlist, and supported by a number of institutions, including the Executive Leadership Council, the NAACP, and the National Urban League. According to the Black Enterprise article, there are a total of 17 Founding Pledge Partners who have undertaken the Board Challenge and agreed to add a Black director in the next twelve months.
The Board Challenge is also supported by a group of 27 Charter Pledge Partners who already have at least one Black board member and who have committed to “use their resources to accelerate change.” These Pledge Partners include a wide variety of types of public, private, and non-profit organizations, including, among others, Corning Incorporated, Lyft, Merck, Nordstrom, the New York Stock Exchange, United Airlines, and Verizon.
The Board Challenge initiative clearly is calculated to try to enlist the support and commitment of other companies that may currently lack Black board representation. Whether related to the Challenge or not, companies lacking Black board representation will also face pressure to address the lack of diversity in the boardroom. Among other things, state-level legislation could compel companies to diversify their boards.
To be sure, the only state to adopt board diversity legislation so far is California; the bill recently passed by the California legislature is now awaiting the signature of Gov. Gavin Newsome. To date, his office has not indicated whether or not he will sign the bill. He has until the end of this month to sign or veto the bill. If he signs the bill, publicly traded companies based in California (regardless of their state of incorporation) must have at least one director from “an underrepresented community” by the end of 2021.
While California is the only state so far to pass this type of board diversity legislation, the Journal article to which I linked above notes that “about a dozen other states,” including Colorado, Maryland, Illinois and New York are considering board diversity legislation.
In addition to the potential compulsion of legislative requirements, companies lacking Black representation on their boards could also face the risk of litigation. As I have noted in a number of prior posts, a total of six publicly traded companies have been sued in shareholder derivative lawsuits alleging that the companies’ boards breached their fiduciary duties by failing to address diversity and inclusion issues in the board room.
It seem likely that companies lacking Black board representation will continue to face scrutiny, pressure, and even the possibility of litigation, creating an environment where corporate leadership may feel compelled to address these issues.
In that regard, it is interesting to note that the companies that signed on to the Board Challenge includes not only publicly traded companies, but a number of private companies as well. While it seems likelier that publicly traded companies will face scrutiny and pressure on board diversity issues, the suggestion of the Board Challenge signatories is that private companies (or at least larger and more prominent private companies) could face board diversity and pressure as well.
One thing that should not be lost amidst this discussion is that the reasons for corporate boards to consider and address board diversity issues are not limited to the consideration of pressure and scrutiny, or to the compulsion of legislation or the threat of litigation. As well-detailed in by Cydney Posner in her August 25, 2020 post on the Cooley law firms PubCo blog (here), there is a substantial and growing body of research supporting the view that companies with diverse boards derive a number of significant benefits and can result in overall better financial performance. Posner’s blog post also provides a very interesting and helpful overview of the practical steps companies can take to try to address board diversity issues.