Cultivating workforces and leadership teams with diverse perspectives and backgrounds has become a priority across the U.S. business community. While government mandates around “diversity, equity, and inclusion” have garnered much attention and backlash, private sector approaches have been able to have a more constructive impact. Unfortunately, some bad actors are threatening this progress.
Smart American companies know that diversity can drive growth. The data shows Diversity generally leads to better business performance, improves employee retention and recruitment, and having people with different backgrounds and perspectives on a company's board of directors improves profitability and increases returns for investors.
For public companies, proxy advisory firms have come to play an important role in board-level decisions, including recommending strategy, governance and even board elections. Investors, particularly institutional investors, pay fees to proxy advisory firms for advice on shareholder votes.
But as proxy firms have grown, they have begun to exercise influence that is not always in the best interests of the companies they analyze.
Scholar Ben Zyker testified last year In a debate in Congress about the disproportionate role played by proxy advisory firms, Zuiker explained, “The SEC's regulatory actions have created powerful incentives for companies and funds to hire proxy advisory firms and adopt their recommendations, often automatically. The advisory firms themselves have little incentive to consider the fiduciary interests of shareholders and fund participants, and so they are free to indulge their own political preferences at little or no cost to them.”
Recent actions by Institutional Shareholder Services, one of the two most powerful proxy advisory firms in the country, against Disney and medical technology company Masimo highlight these problematic dynamics. It caused controversy.
In each case, ISS recommended alternative director candidates over highly qualified candidates proposed by the companies.
At Disney, Institutional Shareholder Services supports Nelson PeltzISS bought activist investor ISS over Maria Elena Lagomasino, a longtime Disney director and executive with extensive governance experience. Disney stressed that Lagomasino's global brands and governance expertise were critical to its strategic objectives, but ISS preferred an investor focused on financial restructuring.
Similarly, at Massimo, Institutional Shareholder Services endorsed the nominee of activist investor Politan Capital Management. William Jellison defeats Christopher ChavezHis experience in the medical device industry, including obtaining regulatory approvals, made him an ideal candidate for Masimo.
The contrast highlights a key criticism of activist investors: By prioritizing their own narrow, short-term interests, activist investors like hedge funds often prevent companies from implementing changes that they believe would benefit employees, customers and long-term investors seeking stability.
A significant development is that both candidates in the ISS rivalry are high-achieving Latinos, and Institutional Shareholder Services previously Inserted In board decisions, they are actively lobbying private companies to cave to the demands of political activists and adopt environmental, social and governance (ESG) agendas, which often include diversity initiatives (even those that revolve around strict mandates).
The Disney and Massimo situations reflect a broader, systemic problem with how influential organizations like Institutional Shareholder Services, and business in general, prioritize or downplay diversity.
Diversity is not just a box to check. In today's interconnected world, diversity is the foundation for effective leadership and decision-making. Latino representation on corporate boards is not just about numbers, it's about bringing a unique perspective to the table — a perspective that reflects the experiences of a significant and growing number of members of the population.
Latino consumers in the United States have great economic power. Boasting a GDP of $2.6 trillion They drive spending growth in nearly every consumer category. Despite these astounding economic contributions, they only make up about 20% of the U.S. population. In 2021, Latinos made up just under 4% of directors at Fortune 1000 companies.Clearly, if done right, much more can be done.
Excluding highly qualified Latino candidates is never a constructive approach and perpetuates the very inequalities that diversity efforts are meant to address. Institutional Shareholder Services' rejection of highly qualified Latino candidates demonstrates hypocrisy that must stop.
True diversity in business leadership is essential to serving customers and reflecting the communities businesses serve, but constructive diversity measures must not be about meeting mandates but about recognizing and valuing the important role that diverse leadership plays in driving innovation, understanding markets, and promoting prosperity for all Americans.
Mario H. Lopez is president of the Hispanic Leadership Fund, a public policy advocacy organization that advances freedom, opportunity and prosperity for all people.
