Shareholders in Google parent company Alphabet will vote at its June 1 AGM on two proposals addressing policies for selecting new directors amid growing investor interest in board diversity.
The SEC recently rejected a request from Alphabet for no-action relief if it excludes a proposal asking that the company report each year on its ‘policies and practices to help ensure its elected board of directors attains racial and gender representation that is better aligned with the demographics of its customers and/or regions in which it operates.’
Arjuna Capital, which filed the proposal, states that such a report might include board targets aligned with customer demographics, progress or challenges in meeting racial and/or gender board diversity targets and strategies or practices used to increase the diversity of board candidates.
The firm states: ‘Our nation’s racial reckoning and [Covid-19’s] illumination of vast social inequities has led companies to re-evaluate their diversity, equity and inclusion policies and goals… Research indicates board diversity is an important lever to increase shareholder value, resulting in higher revenues, higher return on assets, a more diverse workforce, enhanced corporate governance and improved stakeholder relations.’
It argues that the Alphabet board’s diversity is ‘largely disproportionate [to] its customer base. The board of directors [comprises] 27 percent women and 18 percent under-represented minorities... The demographic makeup of the [US], used here as a proxy for its customer base, [comprises] 51 percent women and 32 percent under-represented minorities.’
Arjuna Capital has sponsored proposals at companies on gender and racial pay gap disclosure in previous years. Shareholders in The Walt Disney Company voted at its AGM in March to approve a proposal from Arjuna Capital seeking disclosure around pay equity.
A spokesperson for Disney said in a statement last month: ‘We appreciate our shareholders’ view on this important issue, and the board accepts the results of today’s vote. The company is committed to pay equity, and we will continue our ongoing work on this front, including addressing interest in greater transparency around our efforts.’
‘SUBSTANTIALLY IMPLEMENTED’
Alphabet argued that it should be granted relief to omit the board diversity proposal per Rule 14a-8(i)(10) in that the company has ‘substantially implemented’ it.
‘Diversity, equity and inclusion has long been a key focus of the company and the board, as evidenced by our public disclosures,’ Alphabet said. ‘The company publicly discloses its director selection process and qualifications annually in its proxy statement, which includes descriptions of the policies in place and mechanisms the board uses to incorporate diversity into the candidate evaluation and nomination process – directly relevant to the proponents’ request regarding the company’s ‘strategies or practices.’’
The company argued that it already provides the requested disclosures via its proxy statement and in its public corporate policies and committee charters. It added that its efforts mean Alphabet’s current board comprises 55 percent directors who identify as gender and/or ethnically diverse and noted that the company is subject to California’s legal board diversity requirements.
The SEC did not agree with these arguments, writing: ‘Based on the information you have presented, it appears that the company’s public disclosures do not substantially implement the proposal.’
NON-MANAGEMENT EMPLOYEES
The SEC has also rejected Alphabet’s request for no-action relief if it were to exclude a proposal from the SOC Investment Group urging the company’s board to ‘adopt a policy requiring that the initial list of candidates from which new director nominees are chosen by the nominations and corporate governance committee include (but need not be limited to) non-management employees. The policy should provide that any third-party consultant asked to furnish an initial list will be requested to include such candidates.’
The SOC Investment Group says in a supporting statement: ‘Clearly, the company’s relationship with its employees is critical to long-term shareholder value. Expanding and diversifying the pool of potential director nominees can have important benefits.’
It cites a 2020 National Bureau of Economic Research as finding that giving workers formal control rights increases female board representation and raises capital formation, adding that employees often increase board diversity in terms of race. ‘Other potential benefits include reduced turnover as employees are more empowered to influence firm-specific investments, better informed decision-making because employees have specialized knowledge and better monitoring of management with increased information channels,’ the group writes.
It notes that the proposal is similar to the Rooney Rule used in the National Football League in seeking to expand the pool of candidates for positions, and that many companies have adopted a similar mechanism to increase the representation of women and people of color on their boards.
The SOC Investment Group – previously known as CtW Investment Group – last year helped bring shareholder votes on proposals seeking racial equity audits at several major companies. This year its efforts include bringing proposals urging companies to conduct civil rights audits.
‘SUBSTANTIALLY THE SAME’
Alphabet sought SEC relief to omit the proposal from its proxy materials per Rule 14a-8(i)(12) on the grounds that it deals with ‘substantially the same’ subject matter as a proposal that was voted on and did not receive the support necessary to be resubmitted.
The company stated that it included in its 2019 proxy materials a shareholder proposal submitted by the SOC Investment Group under its previous name: ‘While the resolved clause in the 2019 proposal and the current proposal are not identical, they concern the same subject matter and have the same intention, which is to allow a non-management employee of the company to be appointed and/or elected to the board as a director.’ It added that the proposal received 1.76 percent of the votes cast in 2019.
The SEC did not agree with Alphabet’s arguments, stating: ‘In our view, the proposal does not address substantially the same subject matter as the proposal previously included in the company’s 2019 proxy materials.’
A request for comment from Alphabet was not returned immediately.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
