attorney advertisementCopyright © Cooley LLP, 3175 Hanover Street, Palo Alto, CA 94304. The content of this packet is an introduction to

Cooley LLP’s capabilities and is not intended, by itself, to provide legal advice or create an attorney-client relationship. Prior results do not guarantee future outcome.

Diversity in the Boardroom:

Trends, Obstacles and Why It Matters

ACC Brown Bag co-hosted by SunLaw

July 12, 2018

Cultural Context for Board Diversity Movement

Congressional Attention

• “I’m not urging, I’m not encouraging, I’m about to hit some people across the head with a hammer.” (Maxine Waters (D-CA), presently Ranking Member of the House Financial Services Committee, on the possibility of federal legislation or regulation to improve diversity)

• The House Financial Services Committee will soon consider the “Gender Diversity in Corporate Leadership Act of 2017” that would amend the Securities Exchange Act of 1934 to require each issuer to disclose, in any proxy or consent solicitation material for an annual shareholders meeting, the gender composition of its board of directors and nominees for board membership

• The Congressional Black Caucus Diversity Task Force completed its second trip to Silicon Valley in May 2018 and concluded that diversity in the technology industry is lacking, including at the board level; called for legislative action to hold companies accountable for diversity and inclusion goals 3

Where Do We Stand and Where Are We Going?

16.9% of Russell 3000 board seats occupied by women at the end of Q1 2018

2048Projection for gender parity

4

Institutional Investors Are Demanding Board Diversity

• Regardless of academic research, what is evident is that board diversity is becoming increasingly important to institutional investors and therefore is an issue that companies should be prepared to address

• Ignoring the issue can lead to votes against directors, negative publicity, shareholder proposals and shareholder scrutiny of board refreshment practices

Numerous studies find positive link between board gender diversity and financial performance

Other studies suggest that higher levels of board gender diversity may have a negative or neutral impact on financial performance

5

Institutional Investors Are Demanding Board Diversity, cont.

• In its survey of over 60 institutional investors with an aggregate of $32 trillion under management, the EY Center for Board Matters reported that, among investors’ top priorities for companies in 2018, board composition, particularly gender diversity, was a top priority for 82%

• About half of respondents reported that they consider board diversity in voting, while a quarter do so in the context of proxy contests and shareholder proposals

• The driver appears to be the “interest in effective board composition, given the wide range of studies demonstrating the benefits of diversity, including how diverse perspectives enhance issue identification and problem-solving ability and impede ‘group think’” 6

“If you’re an active manager and you don’t like what a company is

doing, you sell it. If you’re an index manager, you try to fix it.”

• Active investors typically don’t complain about corporate governance unless and until there is a corporate performance problem

• At that point, active investors are quick to analyze board composition

• Dissatisfaction with board composition and board refreshment practices leads to votes against directors

• Lack of diversity may trigger negative votes regardless of the reason for the corporate performance issue

Dissatisfaction with Board Diversity May Lead to Votes Against Directors

7

• Passive investors cannot sell assets in index funds for underperformance

• Instead, they generally push for aspects of corporate governance that they believe are most clearly connected to long-term performance

• Use engagement and voting power to exert influence with management in order to improve company (and therefore fund) performance

• Lack of diversity may trigger negative votes even when company performance is strong

How Are Institutional Investors Effecting Change?

• Adopting proxy voting policies and articulating campaigns

• Sending unsolicited letters asking to discuss board diversity and refreshment or requesting the adoption of certain policies (e.g., BlackRock sent letters to all Russell 1000 companies with fewer than two female directors in February 2018)

• Raising board diversity during off-season engagement on other topics

• Raising board diversity during unrelated proxy solicitation calls (muddying the water when presenting otherwise good governance story and seeking votes for unrelated management proposals)

8

How Are Institutional Investors Effecting Change?, cont.

• Voting against directors when not satisfied with board composition or company response (diversity policy and implementation timeline)

• Ignoring investor requests for engagement/letters or justifying lack of women directors by stating that it is difficult to find diverse candidates increases risk of votes against directors

• Submitting or voting in favor of shareholder proposal

9

Over 150 Companies Have Added Women Directors Since State Street Placed Fearless Girl Statue

What Does NOT Work with Institutional Investors?

Ignoring requests for engagement

Justifying lack of women directors by stating that it is difficult to find diverse candidatesExplaining procedures for selecting board nominees that reflect a failure to “cast a wide net” Agreeing to make changes without identifying concrete steps and committing to a specific timeframe

11

How Are Proxy Advisory Firms Effecting Change?

• Beginning in 2019 Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members• Depending on other factors, including size of company, the industry in

which the company operates and the governance profile of the company, GL may extend this recommendation to vote against other nominating committee members

• Will review a company’s disclosure of its diversity considerations and may refrain from recommending shareholders vote against directors of companies outside the Russell 3000 index, or when boards have provided a sufficient rationale for not having any female board members, or have disclosed a plan to address the lack of diversity on the board

• In 2018, ISS is highlighting boards with no gender diversity but not making adverse vote recommendations for that reason alone

12

What Else Do Institutional Investors Expect and Why?

Institutional Investors Believe Board Refreshment Practices Integral to Board Diversity

Company Performance

Board Refreshment

Policies

Proxy AccessBoard Diversity

Board and Director

Performance

14

Board Refreshment: What Do Investors Ask About?

• Only 5% of S&P 1500 companies have adopted

• Average tenure drops from 8.8 to 7.1 years for companies with term limits

• Individual director evaluations• Transparency • Action around results of

evaluations, including not re-nominating underperforming directors

• Approximately 40% S&P 1500 boards have mandatory retirement policy

• Formerly 72 was most common retirement age

• Trend is increasing to 75

• Gender• Racial and ethnic diversity• Skills and experiences• Age• Tenure Board

DiversityMandatory Retirement

Policies

Term Limits

Board Evaluation

Policies

15

Investor Wish List: Board Composition and Refreshment Generally

A defined approach to board composition and refreshment generally and engagement with major shareholders on these topics

Use of a matrix identifying director qualifications, skills and experiences (including gender and race/ethnicity) and disclosure of the use of a matrix and the elements of the matrix (see Appendix A for samples)

Engagement with major shareholders on how the board identifies nominees for director

A connection between the board evaluation process and board refreshment

16

Institutional Investor Wish List: Diversity Specifically

Ultimately: a more diverse board

A process for identifying diverse director candidates that “casts a wide net” and uses multiple resources, including consideration of director candidates (1) outside of the pool of current and former CEOs and (2) without prior public company board experience (see Appendix B for resources)A process for facilitating shareholder recommendations for director candidates

Articulation of a clear diversity policy and, if necessary, an implementation timeline

Discussion—in both public disclosures and engagement with investors—of plans to incorporate appropriate board diversity over time

An explicit commitment to include diverse candidates in every new director candidate pool (the “Rooney Rule”)

See Appendix C for specific institutional investor policies

17

Shareholder Proposals

18

Real Threat?

• In 2017, 35 proposals related to board diversity and in 2018, 30 proposals; most were withdrawn (likely as a result of agreements with companies to implement changes)

• 9 proposals went to a vote in 2017; 2 passed• 5 proposals have gone to a vote in 2018; 0 have passed• ISS recommended “FOR” 7 of the 9 proposals that went to a

vote in 2017 and “FOR” 3 of the 5 in 2018

19

Other Activity in 2018

• Many shareholder proposals result in many negotiated agreements (proposal withdrawn prior to going to a vote)

• E.g., NY State Common Retirement Fund submitted proposals to multiple companies and has announced agreements with Bristol-Meyers Squibb, Leucadia National, Packaging Corp. of America and PulteGroup

• Public controversy when boards recommend a vote against board diversity policies

• Expect more proposals, withdrawn proposals as a result of agreements with investors… and eventually increased pass rate of shareholder proposals

20

Amazon 2018 Shareholder Proposal

• Cascade of Events:• Shareholder proposal submitted a Rooney Rule resolution:

• Resolved: Shareholders request that the Board of Directors of Amazon.com, Inc. adopt a policy for improving board diversity (the “Policy”) requiring that the initial list of candidates from which new management-supported director nominees are chosen (the “Initial List”) by the Nominating and Corporate Governance Committee should include (but need not be limited to) qualified women and minority candidates. The Policy should provide that any third-party consultant asked to furnish an Initial List will be requested to include such candidates.

• Amazon originally opposed the proposal because “commitment to diversity is reflected in our existing director recruitment and evaluation process” and 1/3 of current independent directors are women

• ISS supported the proposal; Glass Lewis opposed it after determining that Amazon had already demonstrated that it considers diversity when selecting new director candidates

• In a supplemental proxy filing ahead of May 30, 2018 annual meeting, Amazon adopted a policy to include a slate of diverse candidates, including women and minorities, for all director openings and said the policy “formalizes a practice already in place”

• Shareholder proposal was withdrawn before annual meeting21

Amazon 2018 Shareholder Proposal, cont.

• Key Takeaways• Amazon likely needed institutional support for its annual

meeting proposals and relying on current board composition wasn’t sufficient to garner institutional support

• Institutional investors will likely be emboldened by this and may be more aggressive next proxy season

22

ExxonMobil 2018 Shareholder Proposal

• Shareholder proposal submitted a board matrix resolution:• RESOLVED: Shareholders of Exxon Mobil Corporation (‘Exxon’) request that its Board of Directors (the ‘Board’) disclose to

shareholders each director’s/nominee’s gender and race/ethnicity, as well as skills, experience, and attributes that are most relevant in light of Exxon’s overall business, long-term strategy and risks, presented in a matrix form. The requested matrix shall not include any attributes the Board identifies as minimum qualifications for all Board candidates in compliance with SEC Regulation S-K

• Proponent said that would give Exxon shareholders a ‘big-picture’ view of Exxon directors’ attributes and how they fit together, thereby enabling shareholders to (a) assess how well-suited individual director nominees are for the company in light of (i) the company’s evolving business strategy and risks and (ii) the overall mix of director skills and experiences; (b) identify any gaps in skills, experience or other characteristics; and (c) make better informed proxy voting decisions

• Exxon opposed the proposal because “we believe the breadth of our disclosures meaningfully addresses the proposal” and “the success of our Board refreshment process, from the standpoint of diversity, is seen in the results”

• ISS opposed the proposal; Glass Lewis supported it; proposal failed (received only 16.5% support)23

Potential Next Steps

Toe in the Water

• Conduct an annual board discussion on board refreshment and board succession planning

• Use internally a board skills/experience/diversity matrix • Create a plan for identifying and considering diverse director

candidates that utilizes multiple resources outside of informal networks

• Review director search and nomination process in corporate governance guidelines or nominating and governance committee charter (is process followed in practice?)

• Don’t ignore shareholder letters on board diversity/refreshment25

Diving In

• Adopt a formal board diversity policy • Consider including: requirement of an annual diversity report on the

effectiveness of the diversity policy• Consider including: requirement to keep a list of qualified diverse

board candidates• Replace generic “diversity of skills and experience” charter language

with more specific language calling out gender, racial and ethnic diversity

• Consider adopting a policy that requires the board to specifically consider women and other diverse candidates for new board member selections (“Rooney Rule”)

26

Diving In, cont.

• Provide detailed proxy statement disclosure of directors’ diversity characteristics (skills, experience, gender, ethnic, racial, geographic)

• Public disclosure of director skills/experience/diversity in a matrix format

• Disclose board refreshment policies and practices in the proxy statement

• Consider pros and cons of mandatory retirement age and term limits• Consider incorporating individual director evaluations into the board

evaluation process• Consider creating formal link between board evaluations and the

nomination process27

Be Prepared for Shareholder Engagement

• During shareholder engagement on any topic, be ready to discuss:• Policies and procedures related to board diversity, including gender diversity (in

response to an open-ended question)• Board composition and refreshment generally (in response to an open-ended question)• Your board and director evaluation process (including whether you conduct individual

director evaluations) and what is done with the results of the evaluations• How board evaluations are connected to the director nomination process• Whether you have a mandatory retirement age, what the age is, how many of your

directors are close to it (or over) and whether you regularly grant waivers• Whether you have a board tenure policy, what it is, how many of your directors are close

to it (or over) and whether you regularly grant waivers• … and expect the push for board diversity to continue beyond 2018,

ultimately addressing gender, racial and ethnic diversity28

APPENDIX ABoard Matrix Samples

NYC Pension Funds Board Matrix

30

Sample Board Matrix Proxy Disclosure – Individual (Cisco)

31

Sample Board Matrix Disclosure – Aggregate (Pfizer)

32

APPENDIX BResources

Databases & Other Resources for Sourcing Diverse Board Candidates

• Equilar Diversity Network: • “Registry of registries” database of executives from leading ethnic and gender diversity organizations• Searchable by diversity criteria, industry and expertise• www.equilar.com/boardedge• Diverse Director DataSource (3D) was developed by CalPERS and CalSTRS, may be accessed through

Equilar’s BoardEdge• Catalyst Women On Board™:

• Sponsorship program coupled with extensive database• Program: http://www.catalystwomenonboard.org/Home/default.asp• Director Candidate Database: http://www.catalyst.org/women-on-board

• Thirty Percent Coalition:• Nonprofit coalition established to increase board gender diversity• Over 90 members representing public and private companies, professional services firms, institutional

investors, government officials and advocacy groups • List of resources for finding diverse candidates: https://www.30percentcoalition.org/resources/to-identify-board-

candidates• Industry organizations such as WBL Women Leading Healthcare, http://www.wbl.org/?page=ForBoards (board

search referrals)

34

APPENDIX CInstitution-Specific

Policies and Activities

BlackRock: 2018 Voting Guidelines & Engagement Priorities

• From 2018 Proxy Voting Guidelines:

“[W]e would normally expect to see at least two women directors on every board… to the extent that we believe that a company has not adequately accounted for diversity in its board composition, we may vote against the nominating/governance committee members” (emphasis added)

• From 2018 Investment Stewardship Engagement Priorities:

“BlackRock recognizes that diversity has multiple dimensions, including personal factors such as gender, ethnicity, and age; as well as professional characteristics, such as a director’s industry, area of expertise, and geographic location. Diverse boards make better decisions. If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.”

36

BlackRock’s Board Diversity Letter

Excerpt from letter sent to companies with one or no women directors:“In our engagement priorities for 2017 and 2018, we have focused on companies with low or no gender diversity, as gender is a readily identifiable starting point for assessing a board’s diversity profile. We have asked that companies:

• Describe the diversity characteristics of their directors

• Explain how the current board composition aligns with the company’s long-term strategy, and

• Report in detail the Nominating and Governance Committee’s efforts to increase the number of diverse directors.

We believe that this information will help BlackRock and other engaged shareholders better understand the ways boards are raking diversity into consideration and, thus, are committing to improving board quality.”

37

Vanguard: 2017 Investment Stewardship Annual Report

Board diversity is an “important

topic of engagement… during the 12 months ended June 30, 2017”

• “We believe that diversity among directors—along dimensions such as gender, experience, race, background, age, and tenure—can strengthen a board’s range of perspectives and its capacity to make complex, fully considered decisions.”

• “While we have long discussed board composition and diversity with portfolio companies, gender diversity has emerged as one dimension on which there is compelling support for positive effects on shareholder value. In recent years, a growing body of research has demonstrated that greater gender diversity on boards can lead to better company performance and governance.”

38

Vanguard: August 2017 “Open letter to directors of public companies worldwide ”

“Gender diversity is one element of board composition that we will continue to focus on over the coming years. We expect boards to focus on it as well, and their demonstration of meaningful progress over time will inform our engagement and voting going forward. There is compelling evidence that boards with a critical mass of women have outperformed those that are less diverse. Diverse boards also more effectively demonstrate governance best practices that we believe lead to long-term shareholder value. Our stance on this issue is therefore an economic imperative, not an ideological choice. This is among the reasons why we recently joined the 30% Club, a global organization that advocates for greater representation of women in boardrooms and leadership roles. The club’s mission to enhance opportunities for women from “schoolroom to boardroom” is one that we think bodes well for broadening the pipeline of great directors.” (emphasis added)

39

CalPERS and CalSTRS

• CalSTRS sent 131 California companies letters re: lack of gender board diversity in 2014; followed up with letters to 87 companies in 2016

• March 31, 2015 letter to the SEC petitioning for amendment of proxy rule regarding board nominee disclosure in favor of adopting a chart/matrix approach, including “the nominee’s gender, race, and ethnicity” (letter signed by pension funds etc. from CA, WA, CT, NY, OH, NC)

• Regularly use their influence: In 2016 CalPERS ran 18 proxy solicitation campaigns with the NYC Comptroller’s Office regarding proxy access; 13 passed

40

CalSTRS Board Diversity Letter

• Excerpt from CalSTRS board diversity letter:“[W]e regard it as best practice for boards to institutionalize a commitment to diversity in their nominating committee charter. We are asking [company] to commit to include women and minority candidates in every pool from which Board nominees are chosen, a practice commonly referred to as the ‘Rooney Rule.’” (emphasis added)

41

Thirty Percent Coalition

• Through the Thirty Percent Coalition, CalSTRS and others have engaged 250 companies since 2011, of which 150 have appointed at least one woman to their boards

• In 2017, the coalition engaged 81 companies, with 24 appointing a woman to their board

• For 2018, the coalition anticipated engaging 128 companies with either no women or only one woman; engagements include discussions on board evaluation, refreshment and board effectiveness

42

NYC Pension Funds:Boardroom Accountability Project

Boardroom Accountability

Project 1.0

• Focused on proxy access through submission of shareholder proposals

• Resulted in widespread adoption of proxy access bylaws by S&P 500 companies

• Number of companies with meaningful proxy access grew from 6 companies in 2014 to over 425 companies, including more than 60% of the S&P 500

Boardroom Accountability

Project 2.0

• Focused on “corporate board diversity, independence, and climate expertise”

• Launched in September 2017 with letters to 151 U.S. companies, including 140 that have adopted proxy access

• Success of 1.0 has resulted in significant media attention to 2.0

43

NYC Pension FundsBoardroom Accountability Project 2.0

• “Proxy access is a powerful tool and the mere specter of a proxy access candidate is expected to make boards more responsive to their shareowners. But to effectively exercise their newly won voice, shareowners need to know the race and gender of a company’s directors, information that is – by and large –unreported today. In addition, shareowners need to see how each director’s skills and experience fits into the company’s overall strategy, where there are gaps, and understand how boards are refreshed.”

AND• “Today’s persistent lack of diversity on corporate boards is largely due to

a nomination and “election” process that is effectively controlled by the existing board – and as a result, more akin to a coronation…. This lack of quality and diversity can be traced to boards’ failure to cast a wide net when looking for new members.” (emphasis added)

44

Council of Institutional Investors

“The Council supports a diverse board. The Council believes a diverse board has benefits that can enhance corporate financial performance, particularly in today’s global market place. Nominating committee charters, or equivalent, ought to reflect that boards should be diverse, including such considerations as background, experience, age, race, gender, ethnicity, and culture.” (emphasis added)