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Addressing Diversity, Equity, and Inclusion in the Boardroom

To truly integrate Diversity, Equity, and Inclusion (DEI) into a corporate culture, it has to become much more than just words in a planning document. Making effective and long-lasting change starts in the boardroom, with an Environmental, Social, and Governance (ESG) strategy that fosters these ideals throughout the company and its stakeholders. It requires an honest look at where the company is right now, assessing any shortcomings in current practices, setting measurable goals for improvement, and regularly monitoring progress to ensure that objectives are met. We talked with Anna Barrera, Aria Glasgow, and Katie Hill, all part of the ESG Advisory Solutions Group at AON, for their insight on the best practices for ESG.

Developing an ESG strategy is only a first step. Company leaders should continually engage at all levels of the organization, setting clear expectations for performance metrics on DEI issues and establishing communication systems for tracking progress and feedback. Budgets, resources, and systems necessary for success should support these DEI initiatives. 

Most importantly, the company DEI goals must be reinforced in day-to-day operations. This includes developing policies such as a code of conduct, publishing diversity statements, establishing training programs and workshops, and creating mentorships and employee resource groups. This is where ESG becomes critical because it gives you the data points to know if you are hitting the targets you set.

The Role of Board and Executive Diversity

Board and executive diversity have become increasingly important, driven by initiatives like NASDAQ’s board diversity disclosure requirement. Companies across various venues are expected to align with this trend, with other key focuses relying on EEO1 data, gender and racial pay gaps, and shareholder activism. 

While support levels vary, the importance of this shift lies in prioritizing these issues, regardless of the number of proposals or support received. Initiative-driven shareholder engagement, gender and racial equity audits, and climate considerations are just some ways to implement inclusive change at the board level.

Common DEI Challenges Companies Face

The most common area where ESG issues are identified is compensation committee charters. Many of these committees are rebranding themselves as ‘human capital committees’ or ‘people committees’ to reflect their expanded responsibilities, where they manage the full range of people-related matters, including diversity and inclusion. Many companies struggle with tracking DEI metrics, such as gender pay gaps or turnover rates. Developing appropriate tools to measure and monitor this progress can be challenging, which is why ESG is essential.

What is clear is that ESG issues are no longer confined to the periphery of business strategy. They are now central components of committee charters, shaping how companies operate and how stakeholders perceive them. Organizations should be transparent in their DEI efforts and openly communicate goals, accomplishments, and challenges. 

Disclosing Diversity, Equity, and Inclusion (DEI) information

Leading companies are making strides by disclosing key diversity metrics, including pay gap analyses and ratios. These disclosures are not just signs of corporate responsibility but can be a smart business move. Companies that publicly disclose intersectional demographic data have been found to outperform their peers by 7.9% over the year.

This continued public call for transparency is spearheading expanded disclosure and accountability. Glass Lewis, the influential proxy advisor, generally recommends voting against the committee chair if a company does not disclose information about its definition of board diversity or whether the company has a Rooney rule (which requires at least one diverse candidate to be interviewed for each open position).

As stakeholders demand more information, companies are making bolder commitments to advance DEI. ESG provides tools to display your company’s commitment to diversity by generating data to track and disclose DEI initiatives. As more companies disclose EEO-1 level data (information including race and ethnicity, sex, and job category), comparisons in workforce diversity become more straightforward and provide clearer backgrounds into company practices.

There are, however, some critical considerations when disclosing workforce diversity data. It shouldn’t be seen as a marketing campaign but a somewhat real, heartfelt action the company has a firm commitment to making. Beware of ‘diversity washing,’ where companies overstate their commitment to DEI. It might be more beneficial to disclose your company’s steps related to DEI rather than the statistics. Sometimes, visible actions are more impactful than data alone.

Building A Diverse Board

Boards must actively seek out diverse directors who possess the capacity to cultivate their fluency and aptitude in their established DEI concepts. This necessitates providing board education on DEI strategies and considerations in directors’ annual performance evaluations. Retaining your diverse board members starts with maintaining an inclusive culture on that board. This can be achieved through ongoing training, such as unconscious bias training, rotating and developing talent to share leadership roles, and ensuring equitable director compensation.

Even after addressing board diversity, formalizing oversight of DEI strategy, and holding management accountable through DEI metrics, stakeholder expectations, and peer practices are continually evolving practices. Keep an eye on the data and the results, and be open to making shifts as necessary. There is no one straight path for every company.

Benchmarking Your Company

To this end, benchmarking your company against peers on DEI metrics, both quantitatively and qualitatively, can inform your company’s strategy from a market and niche perspective. This involves looking across all public disclosures, just as AON’s ESG Advisory Solutions suggests, including company websites, financial filings, and sustainability reports, to determine the extent to which companies are disclosing DEI information. 

Guide your company’s ESG journey by introducing constructive conversation and dialogue around DEI topics. Encourage your peers to consider the full impact of an organization’s goals, designating roles that can lead DEI initiatives and create a safe space for honest feedback. These are effective ways to foster change. Additionally, you may want to review ESG ratings from third-party providers, which provide comprehensive assessments of a company’s performance based on various factors. Specifically, for those in high-powered roles, we must prioritize Diversity, Equity, and Inclusion (DEI) in the boardroom. 

Change starts with each and every one of us. The more informed we are before entering the boardroom, the more effective we can be in impacting the future.