By Rosa van den Beemt, Vice President, Responsible Investment Analyst, BMO Global Asset Management

Editorial support provided by Kirsty Nicholson, Associate, Content Marketing, BMO Global Asset Management EMEA

Global anti-racism protests have forced corporations to re-examine racism and inequity within their organisations.

Public debate about systemic racism is also set against the backdrop of Covid-19, which is disproportionately affecting black and ethnic minority groups, as well as other vulnerable communities. This further underscores the need for corporate prioritisation of racial inequality and workforce issues.

Many corporations have publicly supported this recent call to action… but do their words and actions align? More transparency is needed – and investors can contribute by engaging companies for stronger policies and disclosure.

Slow progress on corporate racial diversity

How are barriers to inclusion and equality reflected in the corporate workforce?

• In the US, only 3.2 per cent of executives and senior manager-level employees are Black whereas Black people represent 13.4 per cent of the US population.
• Black men in the US are paid 13% less than white men, and Black women 21 per cent less than white women and 39 per cent less than white men.
• In the UK, 37 per cent of FTSE 100 companies don’t have ethnic minority representation on their boards.
• In Canada, Indigenous people represent five per cent of the population but make up less than one per cent of senior executives and board members. In fact, 75 per cent of Canadian companies report not having representation of visible minorities at all on their boards.

The business value of broadening the diversity lens

Beyond addressing discrimination, a report by McKinsey suggests that there is a business case for increasing minority representation.

For example, it found that companies in the top-quartile for ethnic and cultural diversity on executive teams were 33 per cent more likely to have industry-leading profitability. Meanwhile, those in the bottom quartile for both gender and ethnic and cultural diversity were 29 per cent less likely to achieve above-average profitability.

Mounting consumer scrutiny of corporate messaging versus practices on social issues also means heightened reputational risks associated with ignoring inequality and racism. In the wake of George Floyd’s death, several corporate leaders – including the CEO and founder of CrossFit – stepped down amid controversies over inappropriate responses to the anti-racism protests.

Transparency is lacking…

Companies in the US are required to report racial diversity data to the U.S. Equal Employment Opportunity Commission, but only 25 per cent of US companies make this data public. Requirements elsewhere lag far behind.

…But regulators are slowly catching up

Efforts by regulators and standard-setters are increasing.

As of this year, the Canadian Business Corporations Act requires public companies to report on the representation of women, Indigenous peoples, persons with disabilities and members of visible minorities on board and senior management teams. They must also disclose whether they have a policy, targets and strategies to enhance this representation.

California is considering requiring companies incorporated there to have minimum levels of directors from underrepresented communities on the board.

In the UK, the 2020 Parker Review and the UK Corporate Governance Code recommend that companies report on ethnic diversity policies and activities in line with the Code, adopt proactive recruiting processes and develop a pipeline pool of ethnic minority leaders.

All of this adds up to a clear call for greater action by companies, and those who invest in them, to double down of efforts to increase diversity across all levels.

Investor engagement on diversity

So what actions can investors take? At BMO GAM, we’ve been engaging and voting on diversity and inclusion for many years. Although this has primarily focused on gender, we’ve taken steps to enhance our focus on race too.

For example, we endorsed the Investor Statement of Solidarity to Address Systemic Racism and Call to Action coming out of the Racial Justice Investing coalition, based in the US. In line with the statement, we are committed to advancing progress on racial equity and justice at the companies we invest in, as well as within our own organisation.

We also worked closely with the Canadian Responsible Investment Association to develop the Canadian Investor Statement on Diversity and Inclusion, which calls on Canadian companies to advance representation and inclusion of Indigenous, Black and people of colour and to report better diversity data to investors.

Based on those commitments we developed an engagement and voting strategy for the next few years.

Key to this will be meaningful information. That’s why we support the Workforce Disclosure Initiative. We encourage companies to participate in the WDI, and provide greater transparency on their workforce management, including for example wage gaps. Our engagement asks companies to focus on:

• Strategy-setting at the top
• Setting targets and measuring progress
• Hiring practices
• Equitable pay
• Employee engagement
• Education and training

This year’s turmoil shows the heightened need for companies to prioritise the S in ESG and report workforce data accordingly. We ultimately expect companies to take actions towards ensuring a more equal and inclusive future for us all.