More engagement needed to address racial inequality issues
We are a country suffering from racial inequality. And solving that inequality can serve justice and fuel economic growth.
The vast majority of America wants racial inequality and suffering to end. But are finally ready to work towards solving this reality in a meaningful way? The thing is, purposeful action can also be pragmatic. So in a competitive global economy, creating more opportunities for black citizens to thrive represents not only a moral imperative, but also a critical strategy for achieving long-term U.S. economic growth.
Despite our current prosperity levels, the pace of economic growth in the U.S. is slowing and lags well behind more populous countries like India and China. But closing the racial wealth gap in the U.S. could add an additional 4% to 6% to GDP by 20281, or up to & trillion by 20502.
All of which means that the case for closing the racial wealth gap in America, and removing all possible constrains on our human capital is greater than ever. And enough people agree with these points that this issue has become a matter that will impact every corporation doing business in this country. Companies that are capable of understanding their roles in taking effective action to end inequality will benefit operationally and reputationally; those that refuse to acknowledge their exposure to this massive problem or that are incapable of swift and effective action will struggle to maintain their competitive positions as employers and with consumers.
This situation presents substantial opportunity as well as risk for corporations and for investors. Most corporations do not have black people on their boards and few, if any, black people in senior management. This is part of the reason that we have a high level of racial inequality in the US. Companies are not required to achieve diversity, and are not required to disclose the racial identity of their boards or employees publicly. When shareholders and other stakeholders ask companies to address this issue through shareholder proposals, the response is "No." That is the system we have built; a company must disclose its profits to the penny, but not how it manages diversity at any level. This means that despite broad, stated agreement by CEOs and large investors that racism and inequality must end, investors cannot see into companies to know what is actually happening on these critical issues.
As an investor, I am confident that corporate engagement on the issues of management and board diversity, inequality and racism will increase dramatically. Investors will be concerned about a corporation's ability to deal with these changes. How do we expect companies without black people on boards and in senior management to suddenly become great at becoming diverse?
As Jackie Cook of Morningstar recently observed, 30 shareholder proposals that relate to inequality are on shareholder proxies this year. These proposals have received little attention and little support from mainstream investors.3 That will change. Calvert Research and Management will be an important part of this change, but we anticipate that public pension funds of many cities and states and innumerable other asset owners will also swing into gear.
Calvert ran its own analysis of shareholder proposals this year, identifying a range of proposals as relevant to issues of inequality. In each of these cases, Calvert voted in support of the proposal, against management. Sadly, not very many other shareholders voted with us.
This has to change. Investors need to send a clear and consistent message to corporations that diversity and equality are priorities, and transparency must be provided now.
Bottom line: Investors must recognize the escalation of risk associated with ongoing inequality, and the likely challenges that companies without diverse leadership face in dealing with the pressing issues. In order to assess that risk, we need transparency into corporate diversity and equity. We must also engage with companies to help drive the change needed in order to achieve the positive change the country wants - and so badly needs.
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1 Nick Noel, Jason Wright, Duwain Pinder, Shelley Steward Ill, "The economic impact of closing the racial wealth gap," McKinsey & Company, August 2019.
2 Ani Turner. "The Business Case for Racial Equity.· A Strategy for Growth," W.K. Kellogg Foundation & Altarum, 2018.
3 Jackie Cook, "Investors Need to Act on Institutionalized Discrimination," Morningstar, June 12, 2020. Accessible at https://www.morningstar.com/articles/987818/investors-need-to-act-on-institutionalized-discrimination.