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Google’s Latest ESG Crisis: Diversity

Google’s Latest ESG Crisis: Diversity

The push by institutional investors, employees and watchdog groups for companies to take greater social responsibility is overtaking Google once again. The latest hot-button issue to ensnare the search engine monolith: diversity.

 

Employees and shareholders are pressing the board of directors of Alphabet Inc., Google’s parent company, to implement reforms encouraging greater racial and gender diversity among its workers. In a resolution sent last month to Alphabet, they went so far as to recommend the board evaluate tying executive compensation to diversity-related metrics.

 

The proposed reforms are aimed at fixing what their sponsors are labeling a “tech diversity crisis.” The technology industry as a whole has come under fire for the perception that Silicon Valley fosters frat-house cultures dominated by white men. Critics note the lack of diversity even extends to educational backgrounds after a study indicated that a staggering 40 percent of venture capitalists attended either Harvard or Stanford University.

Employee-driven efforts at Google to address high-profile issues, such as cleaning up sexual misconduct within senior management, have come to symbolize an intensifying clash between corporate leaders and a new wave of ESG-minded capitalists. While the Trump administration’s SEC has taken some steps to ease oversight of publicly traded companies, a collection of more reform-minded third parties are exercising their own influence over corporations, outside the government’s regulatory system. They include institutional investors and leading proxy advisory firms, which are taking the fight over corporate social responsibility far and wide. Research on investor proxy voting behavior indicates support for their efforts is growing.

Not surprisingly, companies are fighting back against attempted incursions on their turf. Google defeated a Zevin Asset Management board diversity proposal in 2018; the board stated “true diversity comes from diversity of thought.” Meanwhile, Google’s peers requested “no-action letters” from the SEC to nix similar shareholder proposals on diversity. In 2017, the SEC granted a no-action letter that allowed Apple to throw out a diversity-centric shareholder proposal from Zevin, the same investment firm spearheading the 2018 Google resolution. Likewise, the SEC allowed online retailer eBay to exclude a Zevin-backed diversity proposal in 2018.

Obtaining these no-action letters could become even easier in the near future if business gets its way. In a letter sent to the SEC earlier this month, a coalition of more than 300 public companies joined the Nasdaq stock exchange in calling for changes to the proxy system. They included a request for the commission to streamline the process for issuing no-action letters.

On a related note, the Alphabet shareholder proposal comes at an interesting moment for the SEC. The Division of Corporate Finance – aka Corp Fin – issued guidance in February regarding diversity disclosures. Specifically, it suggested that if diversity factors into a company’s processes for selecting board members, it should disclose that fact.

Whether or not Google will have to take additional action on diversity – including putting its latest shareholder proposal to a vote – remains to be seen. Even if it manages to get relief from the SEC through a “no action” letter, it seems clear that employees, institutional investors and other stakeholders will continue to press for action on their ESG-related concerns.

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