Diversity strategy, goals & disclosure: state street’s expectations for public companies

Multiple studies and statistics show that companies that promote workforce diversity and inclusion are more resilient and report improved productivity, revenues and market share. Likewise, companies with limited diversity are more likely to underperform their peers and face reputational risks.

On 27 August 2020, in light of the ongoing issue of racial diversity, State Street Global Advisors (SSGA) issued a letter addressed to board chairs, highlighting the role of a strong, independent and effective board as the driving force of long-term value. SSGA believes that to provide high-quality oversight, the boards must also be diverse. As a result, SSGA has called on companies to disclose more details regarding the diversity of their boards and workforces through various channels.

SSGA engagements with portfolio companies have revealed that tracking racial and ethnic diversity is challenging for companies, boards, and investors. Racial and ethnic diversity may vary significantly across different countries and regions, and some countries limit the gathering of information related to racial and ethnic minorities. Nevertheless, SSGA reiterated that it is critical for boards and investors to have more robust information and data regarding the racial and ethnic workforce diversity and to understand the steps they are taking to achieve relevant goals. SSGA is of a firm belief that the lack of racial and ethnic diversity and inclusion poses risks to companies that senior managements and boards should understand and manage.

As a result, SSGA will expect companies to address and disclose their risks, goals and strategy related to racial and ethnic diversity. Specifically, SSGA will be asking US companies and, to the greatest extent possible, non-US companies, to provide specific communications to shareholders in the following five key areas:

1.   Strategy - Articulate what role diversity plays in the firm’s broader human capital management practices and long-term strategy.
2.   Goals - Describe what diversity goals exist, how these goals contribute to the firm’s overall strategy, and how these goals are managed and progressing.
3.   Metrics - Provide measures of the diversity of the firm’s global employee base and board (e.g. Board Level - diversity characteristics, including racial and ethnic makeup, of the board of directors, and Workforce level - employee diversity by race, ethnicity and gender, broken down by industry-relevant employment categories or levels of seniority, for all full-time employees). Non-US companies are encouraged to disclose this information in alignment with SASB’s guidance and nationally appropriate frameworks.
4.   Board - Articulate goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company’s workforce, community, customers and other key stakeholders. 
5.   Board oversight - Describe how the board executes its oversight role in diversity and inclusion.

SSGA is also asking companies to assess the barriers to entry and impediments to recruitment and retention of diverse talent, especially at senior levels of the organisation. Companies are encouraged to take steps that ensure that diverse talent pools are sourced, supported and developed. At the board level, the talent pipeline is often narrowed by focusing on job experiences, such as being a former CEO, at the expense of the core competencies that strong directors possess. Companies that intentionally expand their search criteria often cite that there is already a broad pool of racial and ethnically diverse talent available.

If required, SSGA is “prepared to use our proxy voting authority to hold companies accountable for meeting our expectations”.

To read the SSGA letter in full, please click here.