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Friday, April 22, 2016

Rhode Island will use its investment power to push corporate reform

Growing body of research links corporate diversity to financial performance

Hess Corporation, the Hershey Company, ConocoPhillips, EMC Corporation, and Phillips 66 are among the Fortune 500 companies Rhode Island is expected to oppose at annual shareholder meetings this spring, as the result of an initiative to hold companies that the state pension fund invests in responsible for diversifying their boards.

"Any time a company nominates a slate of directors that would cause fewer than 30 percent of its directors to be women or racial minorities, the State of Rhode Island will vote no," said General Treasurer Seth Magaziner.

"The message we are sending to these companies is simple: if you don't feel that you can find enough qualified women or people of color to serve on your boards, you are not looking hard enough," Magaziner said. "We know that companies led by diverse teams have stronger financial performance than those with less diverse teams. Yet many companies aren't doing enough."

The new proxy voting policy positions Rhode Island at the forefront of states addressing the issue of board diversity. Massachusetts recently instituted a voting policy with a slightly lower 25 percent gender diversity threshold.

Despite the fact that diversity leads to better financial performance, less than 20 percent of the board members in S&P 500 companies are women and less than 15 percent are racial minorities, according to the national Thirty Percent Coalition.

"It is long past time to open up our corporate boardroom doors and increase the number of African American and other minority directors. This lack of diversity harms financial performance and does a disservice to our nation," said NAACP-Providence Branch President James Vincent.

Diversity on corporate boards and in the corporate workforce can be correlated with increased employee productivity, greater innovation, more customers, higher talent retention, and better risk management.

"While the business case for gender diversity is well established, the pace of progress has been far too slow," said Women's Fund of Rhode Island Board Chairwoman Daria Kreher. "The Women's Fund commends Treasurer Magaziner and the State Investment Commission for their leadership on this issue of crucial importance to our nation's economic future."

A study by the consulting firm McKinsey last year reported the following: 
  • Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians
  • Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above their respective national industry medians
  • Companies in the bottom quartile both for gender and for ethnicity and race are statistically less likely to achieve above-average financial returns than the average companies in the data set (that is, bottom-quartile companies are lagging rather than merely not leading
In the United States, there is a linear relationship between racial and ethnic diversity and better financial performance: for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8 percent