Can the environmental, social and governance movement finally usher in change?
The environmental, social and governance movement feels more radical today than the well-intended social-good phenomenon that the current U.S. corporate leadership remembers from the 1980s, (i.e. anti-
apartheid divestment campaign), because amidst all the do-good rhetoric, leadership of corporate America remained unchanged. Women, minorities and other underrepresented communities were not at the table in any meaningful way, so calls for social impact investing were just a slight reshaping of the status quo.
They didn’t change how the majority of businesses behaved because the social guidelines were scripted far too narrowly to achieve racial and gender equity in corporations. They represented an aspirational benchmark rather than a pragmatic one.
Which brings us to today, and some compelling questions: Do contemporary ESG guidelines take into account the realities of the world in which we live and do business? Should boards be more active in changing them?
ESG has played a part as a change agent, especially at the board level. It’s a big reason why gender balance is improving on Fortune 1000 boards — up from 15% in 2011 to 22% in 2018, according to a 2019 J.P. Morgan Research study. Still, the pace of change for people of color remains, to put it kindly, a work in progress. And some companies have undermined their commitment to diversity by relegating women and minorities to less influential committees or diluting their voting power by expanding the number of board seats. Progress has largely helped white women.
The truth is that even the most influential corporate boards have little bearing on the day-to-day operations of companies and policies that promote equity throughout the ranks. In 1980, African-Americans held just 3% of all management-level jobs at American companies with 100 employees or more. Four decades later, that number has risen to 3.3%. Moreover, there is no proven correlation between board diversity and the closure of gender or racial pay gaps at individual companies. Statistics fail to capture biases based on sexual orientation, religion, etc.
It’s time to refocus ESG-style investing to rate corporate commitment to the hiring, promotion and cultivation of people of color and women in executive positions. This isn’t to say boards do not have an active role to play. In the end, it is up to boards to hold their leadership accountable for ESG outcomes. But the pipeline of diverse candidates is likely to come from the executive and entrepreneurial cohort that know each other.
Unfortunately, there are fewer indices to track racial equity among leadership positions in the world of ESG-style investing, a roadblock that analytics- and accountability-minded firms are problem-solving right now. “With gender, we’re able to check official documents for pronouns in executive bios, which allows us to score publicly held companies regardless of whether or not they choose to engage with us,” says Iris Kuo, co-founder of LedBetter, a company that provides an online database of gender parity among both executives and boards at hundreds of national companies. But, she adds, creating a similar database for racial equity is more difficult.
“Asking an individual to identify their race is difficult to scale across thousands of people, which is why you don’t see the race data show up more frequently.”
Progress has been slow, even though the most cloistered of privileged men don’t go a day without coming in contact with a woman. Yet these same individuals might never have had a meaningful relationship with a person of color. The fact of the matter is that rising through corporate America is about relationships. And for individuals and organizations committed to diversity, they must sometimes extend themselves beyond what is convenient and comfortable.
Once a corporation’s management team diversifies, it becomes easier to recruit and retain top-tier minority talent into leadership positions. That affects the bottom line. “For every 10% increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes rise 0.8%,” wrote the authors of a recent McKinsey & Company report titled “Why Diversity Matters.”
Many corporations simply lack direction on how to responsibly commit to diversity, focusing solely on quantitative benchmarks or programs like mandatory diversity training, which research has shown have negligible, if not downright negative, effects on diversity in the long run. When forced upon employees, the policies lose efficacy. And if you are not talking candidly with your diverse employees about their experiences within your organization, you are missing the mark.
So what is the answer? “It’s the same with the difference between formal and informal mentoring; it’s the informal mentoring that works a lot better,” says Tony Mayo, a lecturer at Harvard Business School and co-author of Paths to Power: How Insiders and Outsiders Shaped American Business Leadership.
Mayo and his colleagues published a story in Harvard Business Review last year based on researching the career paths of 67 African-American women who had graduated from historically black colleges and universities since 1977. What they learned is that even among the schools’ highly privileged graduates, women required incredible amounts of resilience, patience and emotional intelligence to navigate upward in corporate America. Tellingly, they credited small measures of equity as having outsized effects on their lives: establishing a relationship with a sponsor in the upper echelons of the company, being given access to meaningful assignments.
“One of the things that any organization can do is to place potential ahead of performance,” Mayo says. In many instances, performance is still tinged with subjective (or even biased) criteria.
In other words, the best thing boards can do to move their ESG goals forward is to take a step back and ask if they have personally done all they can do to make space at the table, to be a mentor and an advocate. Encourage socially responsible investors to expand measures of diversity. Relationships, built over years of collaboration among management ranks and investors, will create diverse teams that organically work. And there is nothing more ESG than that.
Denielle Pemberton-Heard is a managing director and General Counsel at Diversified Search, which recently acquired Boston-based Koya Leadership Partners, one of the nation’s top search firms in nonprofit and higher education.