On August 27, 2020, State Street Global Advisors published a form letter it has sent to board chairs of public companies in its investment portfolio, setting forth the next stage of its engagement strategy and heightened expectations regarding board and workforce diversity.1 The letter informs chairs that beginning in 2021, State Street expects these companies to provide “specific communications” to shareholders regarding, among other things, (1) the role of diversity in the company’s human capital management practices and strategy, (2) the company’s goals regarding diversity, (3) measures of the diversity of the company’s board and global employee base, (4) goals for racial and ethnic representation at the board level, including how the board reflects the diversity of the company’s key stakeholders beyond investors, and (5) the board’s role in oversight of diversity and inclusion. To disclose measures of workforce diversity, State Street suggests that U.S. companies “can use the disclosure framework set forth by the United States Equal Employment Opportunity Commission’s EEO-1 Survey.” State Street added that while its “primary tool” for affecting companies’ operations is engagement with management and the board, State Street is prepared to use its proxy voting authority at annual meetings “to hold companies accountable.”
While investor calls for greater board diversity have been pronounced in recent years, demands for heightened commitments and disclosures regarding the diversity of the entire workforce, including endorsements of the disclosure of EEO-1 data, are now also coming to the fore and merit close watching by public companies.
State Street’s latest engagement effort on diversity is coalescing with several developments underway on the global environmental, social, and governance (ESG) landscape.
- Institutional investors are ramping up pressure on public companies to boost the diversity of their boards and workforce and to expand related disclosures. State Street has been outspoken in this regard through its Fearless Girl campaign and prior public calls for companies to increase, and disclose more details about, the diversity of their boards and workforces.2 The past four proxy seasons have seen over 350 shareholder proposals at U.S. public companies calling for disclosure about board and workforce diversity, diversity policies, discrimination, and gender pay gaps.3
- Legislative and regulatory initiatives are underway in the U.S. (and worldwide) to mandate certain disclosures and quotas related to board and workforce diversity and diversity-related goals. For example, in 2018, the State of California adopted a law requiring that boards of publicly-held California-domiciled corporations and publicly-held foreign corporations whose principal executive office is located in California meet specified quotas for female directors.4 On August 30, 2020, the California State Legislature passed a bill that would require the same types of corporations to have at least one director from a minority community by the close of 2021.5 (At the time of this writing, the Governor of California has not yet signed the bill.) Other U.S. states have adopted or proposed similar bills.6 In the U.S. Congress, bills have been introduced to require new types of disclosures related to the racial, ethnic, and general composition of boards of directors and executive teams.7 In addition, as discussed in Sidley’s recent discussion of SEC Updates to Regulation S-K Disclosure, the Securities and Exchange Commission (SEC) recently revised Regulation S-K to require further disclosure regarding a company’s human capital resources.
- Institutional investors are increasingly demanding disclosure of ESG data that is quantitative and facilitates easier comparison of ESG performance across companies.8 In connection with this trend, as discussed in Sidley’s Update regarding the U.S. Government Accountability Office’s report on ESG disclosures, a number of nongovernment standard setters, such as the Sustainability Accounting Standards Board (SASB), have gained in prominence as more companies and investors look to these standard setters for guidance on ESG best practices in disclosures and operations.9
- In connection with a resurgence of discussions in the U.S. and worldwide about “corporate purpose,” institutional investors and other market participants are increasingly demanding that companies look after the interests of “stakeholders” in addition to shareholders.10 Corporations have long seen a connection between looking after stakeholders’ interests and driving shareholder value. But the focus of institutional investors and other market investors on this topic has had a resurgence since 2019 and is shaping demands of investors and other stakeholders for new disclosures and changes in company operations.
Increasing Calls for EEO-1 Data
Under federal law, all companies with 100 or more employees must annually submit an EEO-1 report to the U.S. Equal Employment Opportunity Commission (EEOC).11 The EEO-1 report requires companies to state the number of their employees that fall within racial, gender, and job categories as specified below. Racial categories are broken down into (1) Hispanic or Latino, (2) White, (3) Black or African American, (4) Native Hawaiian or other Pacific Islander, (4) Asian, (5) American Indian or Alaska native, and (6) “two or more races.” Gender categories are broken down into male and female. The job categories include, for example, executives, managers, professionals, technicians, sales workers, and laborers. In general, these reports are filed directly with the federal government and do not need to be publicly disclosed by the filing companies.
Calls among investors and other stakeholders for public companies to disclose EEO-1 data has been gaining traction. A handful of shareholder proposals in recent proxy seasons asked companies to annually disclose EEO-1 data. SASB standards for certain industries recommend disclosure of EEO-1 data as one approach to making disclosures about workforce diversity.12 More visibly, in July 2020, the Office of the New York City Comptroller sent a letter to the CEOs of 67 S&P 100 companies urging each company to commit in writing by August 30, 2020, to publicly disclose its EEO-1 report when submitted to the EEOC in 2021.13 If targeted companies do not comply with the request, the NYC Comptroller indicated that it may submit shareholder proposals or vote against director nominees standing for reelection at those companies’ next annual meeting.
Implications of Calls for EEO-1 Data
The purpose of compelling companies to disclose EEO-1 survey data is to make it possible for investors and other stakeholders to measure and compare change over time, between and among companies and within individual companies.14 In this way, for better or worse, in two to three years, companies deemed to be falling behind other companies or, not meeting their own commitments, will be forced to do so in a public manner. It will then be up to investors and other stakeholders, for better or worse, to decide whether and how they will respond to the results. Potential avenues of action could include further private engagement, shareholder proposals, public pressure, media campaigns (including social media campaigns), boycotts, and lawsuits.
The call for EEO-1 data also is likely one preliminary step in emergent, new demands for ramped-up diversity data, commitments, and performance. In coming years, investors may ask for additional layers of statistics, such as breakouts for additional racial and gender categories, and other types of diversity (e.g., veteran status and LGBTQ+) as well as salary breakdowns for race, gender, and job categories. Some companies are already voluntarily disclosing this level of workforce diversity data. For reference, the end of this Update provides a table containing a summary of disclosure standards regarding board and workforce diversity under both the EEO-1 survey and selected voluntary disclosure regimes, such as the SASB and the Global Reporting Initiative (GRI).
Current Disclosure and a Look to the Future
The SEC’s recent amendments to Item 101 of Regulation S-K require companies to provide a description of their human capital resources, including any human capital measures or objectives that the company focuses on in managing the business, to the extent material to an understanding of the company’s business taken as a whole.15 Unlike what is being called for by proponents of the disclosure of EEO-1 data, this new principles-based rule does not constitute a prescriptive requirement for disclosure or specific diversity statistics of the use of specific measuring criteria. The SEC indicated that it will allow for that disclosure to be tailored to a company’s particular business, workforce, and circumstances and that those factors may evolve over time. SEC Chair Jay Clayton commented, separately from the rule release, that, as is the case with non-GAAP financial measures, he expects companies to hold constant any human capital metric definitions used from period to period or to prominently disclose any changes to the metrics or definitions used.16
Public companies currently take a variety of approaches when disclosing enhanced workforce diversity metrics. Some companies already publish their EEO-1 reports on their company websites. Many companies provide statistics according to the EEO-1’s framework for racial, ethnic, and gender categories, but do not provide the additional workforce breakdown according to EEO-1 job categories. Some companies additionally provide a workforce breakdown but use their own system to categorize jobs, rather than that of the EEO-1 survey. Other companies provide fewer workforce diversity metrics, for example, by providing percentages to show gender and racial diversity among senior management and the workforce, but without providing data for the fuller suite of racial and jobs categories under the EEO-1 framework. This typology of trends aside, it is increasingly common for public companies to disclose diversity information either in selective or comprehensive compliance with voluntary disclosure regimes such as the SASB and GRI.
In the U.S., when companies do choose to publish workforce diversity statistics, they often do so on their corporate websites, rather than in financial filings with the SEC, on the theory that this information is not required disclosure under the federal reporting regime. However, a long-term objective of proponents of EEO-1 disclosures may be able to persuade investors, companies, and the SEC that such statistics are material for SEC reporting purposes, and should be made mandatory through prescriptive rather than principles-based disclosure rules. As addressed in Sidley’s recent discussion of SEC Updates to Regulation S-K Disclosure, certain SEC commissioners already have publicly signaled their openness to considering propositions of this nature.17
Practical Guidance for Public Companies
Given that State Street holds substantial assets under management and a significant portion of shares at publicly-traded companies around the world, its latest initiative is likely to make an impact on public company disclosures in the coming year.
Recognizing that public companies are variously situated in their approaches to, and views regarding, workforce and board diversity goals and disclosure, the following practical guidance is provided for consideration.
- Continue the internal discussions of the board and management regarding diversity goals, weighing ambitions with realism and a focus on process. Innumerable companies have been dedicated for several years to developing their diversity and inclusion efforts. At this time, however, when demand and intent to bolster these initiatives may be greater than ever, companies should evaluate what they may be able to achieve in a two-to-five-year horizon. Relevant considerations should focus on process, including, for example, whether and how to adjust the talent pipeline and implement new targets.
- Articulate diversity-related objectives carefully. Companies looking to state their ambitions should be careful how they frame their commitments, considering how these statements will read in two to five years and the timeframes that may be needed to meet their stated objectives.
- Assess the legal risks of stepped-up diversity policies and disclosures. Companies enhancing their diversity policies and related disclosures must be mindful that doing so can mitigate existing risks while creating new ones, such as inspiring allegations that the company failed to adhere to or achieve projections and commitments regarding diversity. It will be important for disclosing companies to compare diversity disclosures against their own internal codes of conduct, other policies, regulatory documents and public filings and statements made in the course of litigation to be sure there is consistency.
- Be mindful of the data security risks associated with the storage, use, and transfer of personal data required for workforce diversity disclosures. Compilation of sensitive personal data is critical to developing diversity disclosures but also requires that companies consider how to properly manage access to, and use of, this data. Companies should consider implementing a policy relating to the treatment and appropriate safeguarding of diversity data.
- Explore practical and legal rationales for not publicizing EEO-1 data. While the practical reasons for not disclosing EEO-1 data may be sufficiently persuasive on their own, the legal rationale for not disclosing this information should also be part of management’s and the board’s deliberation on this issue.
- Evaluate alternative frameworks for disclosing diversity data. While the NYC Comptroller has specifically called for disclosure of EEO-1 data, State Street’s letter endorses EEO-1 data disclosure only as one possible method for disclosing diversity metrics. Public companies can conduct benchmarking against peers and review standards of voluntary ESG disclosure regimes to observe alternatives that companies are choosing for their workforce diversity disclosures and consider what might be the optimal approach for their particular facts and circumstances.18
- If faced with a specific request or shareholder proposal demanding EEO-1 data disclosure, ensure the legal team has the full perspective on the nature of the demand and the company’s options. Depending on a company’s existing policies and disclosures, it may well be able to disclose metrics outside the EEO-1 framework for the time being. A company may also be able to negotiate withdrawal of a shareholder proposal related to these demands, depending on the proponent and the circumstances.
- Evaluate board-level oversight of diversity and inclusion on a continuous basis. Companies should make close and continuous reviews of the responsibilities borne by its board and board committees for diversity and inclusion matters and of the extent and quality of information being received from management on these matters. Boards should additionally assess, on an ongoing basis, the role of diversity criteria in board processes for identifying and selecting directors and executives. To reduce potential exposure to liability of the company and directors personally, directors should also continuously assess how diversity- and inclusion-related risks are factored into enterprise risk management and company processes for identifying, managing, and mitigating risks related to diversity and inclusion.
|Summary of Disclosure Standards Regarding Board and Workforce Diversity Under the EEO-1 Survey and Selected Voluntary Disclosure Regimesi|
Employer Information Report EEO-1
Section D – Employment Data
Disclosure in tabular format of the number of employees that fall within specified racial/ethnic, gender, and job categories:
Sustainability Accounting Standards Board (SASB)
Workforce Diversity & Inclusion – Example ii
A reporting company determines which SASB-recommended disclosure topics are material and which associated metrics to report. iii
Percentage of gender and racial/ethnic group representation for (1) management, (2) technical staff, and (3) all other employees.
Note to standards:
The entity shall describe its policies and programs for fostering equitable employee representation across its global operations…. Relevant aspects of employee representation include, at a minimum, gender and race/ethnicity. The entity may disclose on other aspects of its workforce, such as age, physical abilities/qualities, sexual orientation, and religious beliefs as relevant to local jurisdiction.
Global Reporting Initiative (GRI)
Companies are asked to cover material topics as defined by GRI.iv All reporting companies must comply with certain “General Disclosures” (GRI 102). Beyond this, “Core” reporters comply with all “Management Approach” disclosures (GRI 103) and at least one “Topic-Specific” disclosure from among several recommendations (GRI series 200, 300, 400), and “Comprehensive” reporters comply with all Management Approach disclosures and all “Topic-Specific” disclosures.
General Disclosures (GRI 102)
Management Approach (GRI 103)
Pursuant to GRI 103, see
Topic-Specific (GRI series 200, 300, 400)
Series 200 (Economic Topics)
Series 400 (Social Topics)
World Economic Forum
Consultation Paper – Toward Common Metrics and Consistent Reporting of Sustainable Value Creation (2020)
Companies are expected to disclose information on employee matters and on the potential and actual effects of their operations on stakeholders.
Dignity and Equality
Skills for the Future
i This summary presents abridged versions of standards and is not a complete representation of all text and standards that may be applicable to board and workforce diversity within each disclosure regime.
ii The example provided is a redacted version of standard TC-IM-330a.3 contained in SASB, Internet Media & Services Industry Standard, Version 2018-10 (October 2018). SASB does not include Workforce Diversity & Inclusion standards in all of its separate industry standards manuals for 77 industries across 11 sectors. The Workforce Diversity & Inclusion standards also may vary across the industry standards manuals in which they appear. According to the SASB Materiality Map as of the date of writing, SASB considers the issue of diversity “to likely be a material issue for companies” in 11 of the industries for which SASB has published standards manuals.
iii SASB states that it “recognizes that each company is responsible for determining what information is material and … should be included in its SEC filings.” In identifying from its perspective “sustainability topics that are reasonably likely to have material impacts,” SASB “applies the definition of ‘materiality’ established under the U.S. securities laws.” SASB, SASB Conceptual Framework (Feb. 2017) (currently under revision).
iv GRI defines a “material topic” as a “topic that reflects a reporting organization’s significant economic, environmental and social impacts; or that substantively influences the assessments and decisions of stakeholders.” GRI, Consolidated Set of GRI Sustainability Reporting Standards 2020, GRI 101, at 27.