I had the privilege of moderating a Page Hot Topics discussion on a subject that is on the minds of many boards, C-suites and comms and corporate affairs officers: What are the corporate governance implications of COVID-19 and the racial injustices exposed by the horrific murders of Black people? How are boards responding, and how are companies communicating decisions, actions and other steps taken to address COVID’s impact on employee health and welfare? How can boards and companies help bridge the racial equity divide in this country? And what are the reputational and governance risks companies face by acting…or not acting?

The experts who shared their insights from the boardroom to the investor perspective included: Frank Aquila, a senior partner at Sullivan & Cromwell and one of the deans of the M&A and governance bar; Pamela Marcogliese, a partner at Freshfields who advises on capital markets and governance and ESG matters; and Lauren Taylor Wolfe, a founding partner at Impactive Capital, an activist investment fund with an ESG focus that is majority-owned by women and minorities.

There are governance pressures around diversity building from the courts to large shareholders. We are now seeing significant class-action lawsuits against companies such as Oracle, Facebook and Qualcomm that allege their public statements on diversity, in their proxies and elsewhere, have fallen short of their commitments. This is a new line of attack that companies should watch carefully.  

Also on the governance front, the New York City Comptroller’s office has proposed a so-called “Rooney Rule” akin to the NFL’s pioneering rule that says a team must commit to considering Black candidates and candidates of color. The Comptroller called on 56 companies to adopt policies requiring the consideration of both women and people of color for director and CEO positions.

In a very positive signal that diversity makes companies stronger, Moody’s credit rating agency has described Lloyd’s Banking Group’s efforts to promote more Black employees to senior roles as “credit positive,” marking the first time, according to the Financial Times, that the rating agency has explicitly linked a company’s financial and business stability to ethnic and racial diversity. 

Frank Aquila of Sullivan & Cromwell said boards have come a long way in the past 20 years and that much progress has been made. “Boards are increasingly aware of these issues and have an interest in seeing the reputation of the company and board itself being viewed as diverse and sensitive to the issues,” he explained. “Managements are judged by different metrics, mainly financial, so they don’t always have the same interest. Boards tend to be more progressive than management.”

“I can tell you in my over 30 years in boardrooms, they are more innovative and have less groupthink, and ask more questions than a less diverse board,” he said.

Pamela Marcogliese of Freshfields pointed out that over the past eight years or so the ESG movement has exploded and boards have had to deal with all sorts of new issues. She believes the ESG movement has propelled communications as a critical tool in both engaging with all stakeholders while allowing constituents such as employees have a larger voice.

At the same time, ESG can’t be some sideshow but rather must be “fully integrated into the enterprise,” she explained. “There’s always at least an implicit discussion about the competitive implications and societal value of efforts like ESG. It’s important the competitive and societal are tied together.”

Lauren Taylor Wolfe, who brings the perspective of an activist investor with an ESG lens but who is also on the board of publicly traded HD Supply, agrees that ESG has to be attached to a business outcome and needs to get board buy-in.

“ESG earns more commitments from all kinds of stakeholders and makes the business more sustainable and viable over the long term, makes engagement stickier.”

We discussed the dearth of relevant data on the racial and ethnic makeup of companies by compensation or pay-scale, which is tabulated but not publicly disclosed, and how perhaps companies need to get ahead of what may be an emerging trend that will very much require thoughtful communications strategies.

“On ESG there is already a lot of disclosure expectation among investors; same will become true on DE&I in the next year or two – demanded not just by shareholders but society at large,” Wolfe said.