The pandemic’s disruption has had divergent effects on different population segments. In the following guest post Sarah Abrams, Esq., Director, Management Liability Markel, takes a look at the implication of this divergent population impact upon organizations’ diversity and inclusion efforts. The viewpoints expressed in the article are the authors alone and that not that of Markel. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
How can companies meaningfully manage legislative and regulatory initiatives meant to promote inclusion and diversity at a time when women and minorities are exiting the workforce in droves? How will insurers assess the risk of underwriting companies facing this dilemma?
This paper is a follow-up to Shareholder Board Diversity: New Legal and Legislative Challenges, October 2020 (here), which addressed a flurry of shareholder derivative lawsuits, as well as California legislation meant to push companies[i] towards diverse and inclusive leadership. In particular, this paper will examine how COVID-19 has spotlighted the issue of gender parity at home and in the corporate setting; related legislative initiatives and activist shareholder litigation; and finally, strategies for addressing the issue despite dichotomous social and corporate environments.
The COVID-19 Effect
McKinsey’s 2020 Women in the Workplace[ii] study revealed that more than one in four women is contemplating downshifting or walking away from their career. According to the Bureau of Labor Statistics, of the workers who left the labor force in September 2020, 80% were women, including 324,000 Latinas and 58,000 Black women.[iii] Four times more women than men dropped out of the labor force in this timeframe. Before the COVID-19 pandemic, Women in the Workplace research had consistently found that women and men leave their companies at comparable rates.[iv]
At the same time, with respect to rising in the corporate ranks, the McKinsey study noted that in 2019, for the sixth year in a row, women continued to lose ground at the first step up to manager. For every 100 men promoted to manager, only 85 women were promoted—and this gap was even larger for some women: only 58 Black women and 71 Latinas were promoted as compared to white men. As a result, women remained significantly outnumbered in entry-level management at the beginning of 2020: they held just 38% of manager-level positions, while men held 62%.[v] Thus, even prior to the pandemic, women, particularly women of color, were not being elevated to leadership roles.
Then, with the COVID-19 crisis, came the acceleration of women leaving the workforce. Two out of every three caregivers in the United States are women, meaning they provide daily or regular support to children, adults, or people with chronic illnesses or disabilities.[vi] COVID-19 has now expanded caregiving to include caring for family members who fall ill, overseeing children’s remote school, and the latest responsibility, attempting to secure vaccinations for family members.[vii]
Federal Actions Add to the Legislative and Litigation Picture
Meanwhile, the Biden administration, state legislators and activist shareholders are all demanding leadership that is more inclusive and diverse.
On January 20, 2021, President Biden signed an executive order, On Advancing Racial Equity and Support for Underserved Communities through the Federal Government.[viii] The executive order lays out the systematic approach that various government agencies will employ to determine whether, and to what extent, its programs and policies perpetuate systemic barriers to opportunities and benefits for people of color and other underserved groups.[ix] It also provides a roadmap that could become the standard utilized by agencies tasked with evaluating corporate ESG disclosures.
The January 20 executive order is aimed at federal government agencies, and contains a timeline similar to California’s corporate board diversity and inclusivity legislation[x]. In one year, the head of each federal agency must produce a plan to address barriers which have prevented underserved communities from enrolling and receiving full and equal participation in government services, and to determine whether new policies may be required to execute on the goal of developing policies and programs that deliver resources and benefits equitably.[xi] Each agency head must also offer data regarding pilot programs to test model assessment tools; and federal resources will be allocated to address historic failures to invest sufficiently, justly and equally in underserved communities.[xii]
Under the federal government approach laid out in President Biden’s January 20 executive order, a data working group (DWG) will gather data with a focus on segregation by race, ethnicity, gender, disability, income, veteran status, and other factors, as well as how those populations are impacted and how they utilize federal programs. In addition to the DWG, the head of each federal agency identified in the order has 200 days to provide a domestic policy report, and within one year must have a plan to address barriers to full and equal participation in federal programs and contracting opportunities.
While California, other states and now NASDAQ are pushing for diversity requirements, the execution of how eligible companies reach the requisite female and underrepresented minorities on boards within the next few years is not laid out as it is in the January 20 executive order.[xv]
Meanwhile, shareholder derivative board diversity litigation remains pending against nearly a dozen companies alleging breach of fiduciary duty and systemic failures to achieve board diversity that aligns with public statements of being a diverse company.[xvi]
The Potential Corporate Impact
These developments indicate some potential approaches for companies to consider. While the breadth of the federal government’s approach may not be realistic for private sector companies, the trends identified in the January 20 executive order can be identified as a potential risk to their organizations. In addition, the companies that are targeted in the shareholder derivative lawsuits may see an opportunity to blunt attorney’s fees and therapeutic costs by appointing women and minority to leadership and boards of directors. Research also continues to show that diversity in company leadership and on boards of directors literally pays off in profitability.[xvii] McKinsey’s Diversity Wins May 2020 report revealed that in 2019, companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the lowest quartile—up from 21% in 2017 and 15 percent in 2014.[xviii]
Moreover, the Diversity Wins study found that the greater the representation, the higher the likelihood of outperformance. Companies with more than 30 percent women executives were more likely to outperform companies where this percentage ranged from 10 to 30; and in turn, these companies were more likely to outperform those with even fewer women executives, or none at all.[xix] A substantial differential likelihood of outperformance—48 percent—separates the most from the least gender-diverse companies.[xx]
In sum, this data buoys calls from shareholders to keep companies accountable for their statements regarding diversity and inclusivity focus. Yet how can those companies achieve the requisite metrics when women and minority talent is difficult to find?
Developing a Forward-Looking Strategy to Address these Issues
The strategy that companies have employed to update paid leave policies, provide resources to help employees work remotely and expand their mental health and well-being programs has not been effective in stopping the leakage.[xxi]
The Women in the Workplace report found that the failure to adjust employee performance review criteria to account for the challenges created by the pandemic was one reason women, and specifically minority women, were leaving companies.[xxii] Thus, high-performing employees—especially parents and caregivers—face the choice between falling short of pre-pandemic expectations and pushing themselves to keep up.[xxiii]
While underwriting of management liability coverage with an eye towards diversity and inclusion may focus on talent acquisition for board and management roles, the retention of institutional high-performing employees is also a critical consideration. In particular, analyzing the process through which companies recruit and retain female and underrepresented community members in positions of leadership is critical.
The trends identified in the Jan. 20 executive order can potentially forge a path for a company to address parity in a number of areas. This may lead to an evaluation of data around promotions, raises and leakage by gender and race. It may also lead to a review of present performance expectations, and whether they are realistic. Consideration may also be given to the benefit of advanced training for leaders in areas such as bias training.
[i] Publicly traded companies domiciled in California are subject to AB 979 and SB 826.
[ii] McKinsey’s study, conducted in partnership with LeanIn.Org, tracks the progress of women in corporate America. The data set this year reflects contributions from 317 companies that participated in the study and more than 40,000 people surveyed on their workplace experiences; more than 45 in-depth interviews were also conducted to dive deeper on the issues. https://www.mckinsey.com/featured-insights/diversity-and-inclusion/women-in-the-workplace#
[x] SB 826, AB 979. Also see, 2019 California Assembly Bill No. 979, California 2019-2020 Regular Session.
[xv] https://www.washingtonpost.com/business/2020/12/01/nasdaq-diversity-board-directors/ ; see also https://www.corporatesecuritieslawblog.com/2020/12/ca-bill-ab-979-board-diversity/
[xvi] See Shareholder Board Diversity: New Legal and Legislative Challenges, S. Abrams, October 2020. https://www.linkedin.com/feed/update/urn:li:activity:6724790820823732224/
[xxii] Notably, less than a third of companies adjusted their performance review criteria to account for the challenges created by the pandemic and about half had updated employees on their plans for performance reviews or their productivity expectations during COVID-19. Id.