September 27, 2021

Volume XI, Number 270

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September 24, 2021

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ISS' Arbitrary And Capricious Assessment Of Board Diversity

Last week, Liz Dunshee at TheCorporateCounsel.net noted that ISS has updated its policies and procedures to explain how it assesses racial and ethnic diversity.  Currently, ISS considers board diversity in making voting recommendations for two of its specialty policies: Socially Responsible Investing (SRI) and Catholic Faith-Based.  Beginning in 2021, ISS, under its U.S. Benchmark policy, began identifying companies United States companies that have no apparent racial or ethnic diversity amongst directors.  For shareholder meetings after February 1, of next year, ISS will make adverse vote recommendations based on a lack of apparent racial/ethnic diversity.  

ISS classification scheme (available here) lists numerous racial and ethnic categories.  Persons who did not fall within any of these categories default into the "Caucasian/White" category.  ISS classifies "Caucasian/White" persons as non-diverse for purposes of its voting policy.   What immediately struck me was the arbitrariness and illogic of ISS' diversity classification scheme.  For example,

  • A person with with origins in any of the Persian or Arab countries in the Middle East or North Africa is classified as "Middle-Eastern/North African" and hence diverse.   According to ISS, a person with origins in the State of Israel is considered "Caucasian/White" and hence is not diverse.   Why does ISS consider people from all of the countries of the Middle East to be diverse except people from Israel?

  • A person from French Guiana or Guyana, where the official languages are French and English, respectively, is classified as "Hispanic/Latin America" (i.e., a person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin, regardless of race) an hence diverse while a person with origins in France or England defaults to "Caucasian/White" and hence is not diverse. 

  • A Portuguese speaking person from Brazil is classified as "Hispanic/Latin America" and hence diverse while a Portuguese speaking person from Portugal is considered "Caucasian/White" and hence is not diverse.

ISS also doesn't explain what it means to have "origins" in a particular place.  Is a person's origin where he or she was born or where his or her ancestors were born?  If it is the latter, must all of a person's ancestors be from an ISS favored region?  If a person can claim his or her origin based on something less 100%, is a majority, plurality or some lesser quota sufficient? 

Another problem with ISS' categories is the reference to "Spanish culture".  What does it mean for a person to be of "Spanish culture"?  Must he or she speak Spanish, enjoy Spanish music, and/or eat primarily Spanish food?   Is the reference to "Spanish culture" a reference to the culture of the country of Spain or to countries in which the Spanish language is primarily spoken?  If it is the latter, why does ISS consider Spanish culture diverse, but not the people whose origins are in Spain?  Why is Spanish culture favored over Portuguese or Basque culture?   Of all the many and varied cultures in this world, why does ISS refer only "Spanish culture" in determining who is and who isn't diverse?

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 139
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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