TechTalk Blog - States and Capital Markets Begin To Mandate Diversity & Inclusion Metrics for Corporate Directors and Disclosures -- XBRL Can Play a Role in Making More Transparent & Accountable to Drive Capital Market Investments

By David Colgren posted 03-22-2018 10:43 AM


Interesting legislation being introduced in California that would require public-traded corporations to have women and minority board members to promote corporate culture focused on diversity and inclusion to promote greater economic opportunity through jobs for all Americans -- setting the tone from the top. The California bill would require at least three women on boards for both US and foreign companies operating in the state.

The legislation introduced in California is in direct response to the lack of DIVERSITY on US Company Boards, missing WOMEN and UNDER REPRESENTED STAKEHOLDERS -- According to BloombergMen hold about 80 percent of all board seats for companies in the S&P 500 stock index. Growth in female representation on those boards has slowed. One-quarter of Silicon Valley companies had no female directors when surveyed in 2016 by Bloomberg.

According to a report prepared by the US Government Accountability Office (GAO) to Congress: women make up almost half of the nation's workforce, yet research shows that they continue to hold a lower percentage of corporate board seats compared to men. The report states: it is estimated that it could take more than four decades for women's representation on boards to be on par with that of men's. 

Fewer gains have been made at the executive level, which may be more challenging to address than board membership. 

The U.S. has flipped from a relative leader in boardroom gender diversity to a laggard in five years as other countries have successfully employed legislation and threats to boost representation. Many European countries have adopted quotas -- public companies are required to have women in 40 percent or more of their board members in Denmark, Iceland, France, Norway and Spain, according to New York City research firm MSCI. The threshold is at least 30 percent in Belgium, Germany, Italy, Malaysia and the Netherlands — something not likely to fly in the U.S. according to the GAO study— while Australia has demanded simple corporate transparency and disclosure. The Stoxx Europe 600, U.K. FTSE 350 and Australia ASX 200 all have almost tripled their median female board representation to 25-30%, while the U.S. S&P 500 has plodded along to 22%.

According to the National Association of Women Business Owners: Today, more than 11.6 million USA firms are owned by women, employing nearly 9 million people, and generating $1.7 trillion in sales as of 2017. According to the Small Business Administration there are 27.9 million small businesses in the USA. Women-owned firms (51% or more) account for 39% of all privately held firms and contribute 8% of employment and 4.2% of revenues. One in five firms with revenue of $1 million or more is woman-owned and 4.2% of all women-owned firms have revenues of 1 million or more. Women of Color: More than 5.4 million firms are majority-owned by women of color in the U.S. and these firms employ 2.1 million people and generate $361 billion in revenues annually.

The economic power of women continues to rise. A new McKinsey Global Institute report finds that $12 trillion could be added to global GDP by 2025 by advancing women’s equality. The public, private, and social sectors will need to act to close gender gaps in work and society. The capital markets is responding to the growing economic influence of women and women issues facing both business and domestic areas. Putting women in senior positions of corporations is the logical progression of this growing economic influence and can actively lead to major corporate value-add linking growing interest from the investment community as a corporate best practice.

For example, the Criterion Institute has played a significant role in creating and defining the field of gender lens investing, pushing beyond the traditional measures of women-led businesses or women on boards to look more holistically at how data on gender patterns can be integrated into financial analysis, investment processes and deal structures, ultimately leading to better outcomes. 

Recently, Criterion Institute also launched an initiative on using finance to address gender-based violence, a critical issue that affects 1 in 3 women worldwide and costs an estimated $1.5 trillion annually, or 2% of global GDP. Like climate change, gender-based violence presents a risk to any industry, company or geographic market, and we can influence how that risk is assessed, the data investors see as valuable, and how investors and analysts respond. The Institute recently launched a "A Blueprint for Women's Funds on Using Finance as a Tool for Social Change" to help the women's funding movement in developing solutions to end global violence against women.  


Board diversity continues to be a significant issue for many pension fund investors. In July 2017, CalPERS sent letters to Russell 3000 companies that it believes lacked diversity, and a follow-up was directed in December toward companies where they received no response or inadequate response.  The fund may vote against the board chair and the entire nominating and governance committee at those companies in 2018. 

The Wall Street Journal wrote earlier this week that the New York State Fund - a major state pension - intends to oppose the re-election of all directors at hundreds of U.S. corporate boards without a single woman. Mr. DiNapoli said the $209 billion pension fund will cast votes against members of corporate board governance committees for companies with only one female board member. The guidelines include the statement: "The board believes that its membership should continue to reflect a diversity of gender, race, ethnicity, age, sexual orientation and gender identity."

 In recent months, the $231.6 billion California State Teachers' Retirement System, West Sacramento, said it will withhold votes from directors at companies without women on their boards. BlackRock(BLK) has said it now expects companies to have at least two women on their boards and proxy adviser Glass Lewis & Co. in December pledged to start recommending votes against directors at Russell 3000 index companies with all male boards in 2019.


Minority representation on US Boards of Directors is also underrepresented. According to Fortune Magazine the share of African-American appointees was virtually unchanged from 2015 at 9.3% in 2016, Hispanic or Latino and Asian American appointees saw significant gains. Each group grew to 6.4% in 2016.  Only 1 in 5 new board appointees at Fortune 500 companies are not white.

In 2015 The US Census Reported that there were 2.6 million black or African American-owned firms nationally in 2012, up from 1.9 million or 34.5 percent from 2007.[49] Payroll and employment for minority-owned employer firms in the nation also increased from 2014 to 2015 by approximately 7.0 percent ($237.5 billion to $254.0 billion) and 6.2 percent (7.6 million to 8.0 million people employed), respectively. Receipts for minority-owned firms in 2015 were estimated at $1,168.5 billion — not statistically different from the 2014 total of $1,089.7 billion according to the US Census

Boardroom diversity and anti-discrimination policy disclosures are also moving into other stakeholders including the LGBTQ community. According to a recent National Gay and Lesbian Chamber of Commerce report -- certified LGBT businesses contributed more than $1.15 billion to the national economy. If the total contributed value of the estimated 1.4 million American LGBT business owners is considered, input to the economy is over $1.7 trillion. That would make LGBT Americans the 10th largest economy in the world. For a little perspective, that’s bigger than the economies of Australia, Canada, and South Korea combined.

The LGBTQ community is asking Fortune 500 companies to assign board members and also incorporated and disclose anti-discrimination policies related to sexual orientation and gender identity and expression into their workplace. With the recent federal court decisions regarding Title VII of the Civil Rights Act of 1964, which bars discrimination on the basis of sex in the workplace which has been legally extended to support anti-LGBTQ employment discrimination -- the LGBTQ community is encoraging companies to appoint LGBTQ board members and senior executives to leadership positions of their organizations to tap into the LGBTQ investment marketplace -- esepcially if services or products are targetting the LGBTQ customers. Apple's CEO -- Tim Cook for example has been very supportive in promoting LGBTQ anti-discrimination policies and making them public: "At Apple we believe in equal treatment for everyone, regardless of where they come from, what they look like, how they worship or who they love. We fully support the expansion of legal protections as a matter of basic human dignity." 

ISS has updated its Socially Responsible Investing (SRI) and Catholic Faith-Based policies so that the proxy advisor will recommend against incumbent governance committee members under the SRI policy, and all incumbent board members under the Catholic Faith-Based policy, at boards that are not at least 30% diverse and include at least one woman and one ethnic minority.  Given that only 24% of Russell 3000 boards have such composition, the policies are expected to result in a “substantial increase” in the number of negative recommendations for directors.  At the current pace, S&P 500 boards are expected to reach 30% diversity by 2028, but not until 2037 for Russell 3000 companies. 

Thomson Reuters and other capital markets data companies are tracking this information disclosed by companies and opportunities exist for companies to begin to tag this data in the XBRL data standard used by companies to report financial information to the US SEC. Combining this non-financial information with financial data will help investors better link diversity and inclusion with financial sustainability through “integrated reporting”…

The United Nations on March 8, 2018 celebrated International's Women's Day with a global collaboration of 63 stock exchanges around the world committed to “Ring the Bell for Gender Equality”. The events are a partnership between IFC, Sustainable Stock Exchanges (SSE) Initiative, UN Global Compact, UN Women, the World Federation of Exchanges and Women in ETFs, to raise awareness about the business case for women’s economic empowerment and the opportunities for the private sector to advance gender equality and sustainable development. As part of the events, participants are encouraged to make commitments to improve gender equality in their markets, such as signing the Women’s Empowerment Principles, improving diversity in senior management and on the boards of directors, developing more gender-friendly policies, developing a gender-themed investment product, or improving transparency on gender policies and practices.

 Countries like South Africa have mandated the use of XBRL for both financial and non-financial data disclosed by public companies to the capital markets. This includes diversity and inclusion data under KING IV DIRECTIVE in South Africa to promote a more diverse and economic reporting structure to unite and support a growing democratic country.

In addition, South Africa mandates that specific third-party, independent audits be conducted for Broad Based Black Economic Empowerment (BBBEE) disclosures.

 Key provisions of the KING IV DIRECTIVE for corporate governance disclosure includes:

  • Board of directors makeup and mandate, including the role of non-executive directors and guidance on the categories of people who should make up the non-executive directors
  • Appointments to the board and guidance on the maximum term for executive directors
  • Determination and disclosure of executive and non-executive director’s remuneration
  • Board meeting frequency
  • Balanced annual reporting
  • The requirement for effective auditing
  • Affirmative action programs
  • The company’s code of ethics [8]

The King Report on Corporate Governance has been cited as "the most effective summary of the best international practices in corporate governance".[3]

 Will the same happen in the world’s largest capital market – USA – for better corporate governance, transparency and accountability of its public companies? Will the audit function also shift to these non-financial disclosures and will digital assurance be provided to enhance even greater economic prosperity and prevent marginalization and segregated disinvestment through better democratic representation and stakeholder engagement?  

McKinsey & Co’s January 2018 report Delivering through Diversity revealed that companies in the top quartile for gender diversity in their executive teams were 21 per cent more likely to achieve above-average profitability than companies in the fourth quartile.

 According to a recent article in Forbes Magazine:

  • Inclusive teams make better business decisions up to 87% of the time.
  • Teams that follow an inclusive process make decisions 2X faster with 1/2 the meetings.
  • Decisions made and executed by diverse teams delivered 60% better results.

The New York Law Journal recently reported:

 Gender diversity on boards and in executive leadership is a key social issue for investors. The related issues of gender pay equity and sexual harassment have also increased in prominence, and the business community has begun to view gender diversity and pay equity as essential to a healthy and successful enterprise. Happily, this is an area where the business case and the social benefit are aligned. Data show that diverse boards lead to better performance, risk management, and returns. Going forward, boards with a lack of diversity will find themselves under increasing pressure to take meaningful steps toward inclusion. Investors do and will continue to urge companies to remedy gender pay inequities and maintain a workplace free from sexual harassment so as to attract and retain top female talent.

Call to action:

The capital markets can be one of the most important tools to help create positive social change to enhance economic prosperity for all citizens. The capital markets needs a means by which this disclosed data can be tracked and analyzed for investment purposes in a machine-readable format. Management accountants can play a leading role in helping companies utilize the XBRL global data standard for enhanced disclosure of non-financial data. They can also play a role in new, future digital assurance services that will be required to support the acceptance of this disclosed data -- just like the financial XBRL data that is being disclosed by companies. 

The IMA recently published a white paper in partnership with Committee on Sponsoring Organizations (COSO) on "Effective Internal Controls Help Improve Confidence in Sustainability Information" that can help companies build trust and confidence in their information that is used for both internal and external reporting that includes data in non-finanical disclosures. Management accountants are an important player in this area of new interest so stay tuned.    

The XBRL global data standard created and used by the management accounting profession can be also used to help provide this additional transparency and accountability globally. Countries outside the USA are actively expanding this additional data disclosure and creating internal controls to also include non-financial data.

Hopefully the United States can follow this global trend for enhanced transparency and accountability of corporate disclosures to the capital markets to promote social change for a better and more peaceful and sustainabile world for future generations to come.


#iXBRL #Women ​