On March 7, 2017, the eve of International Women’s Day, State Street Global Advisors initiated its “Fearless Girl” campaign, an effort to increase the number of female directors on the boards of its portfolio companies.According to State Street, at the time the campaign began, approximately a quarter of those companies lacked even a single woman director. State Street followed through on its announcement by voting against the reelection of directors at companies that failed to make meaningful progress in improving the diversity of their boards.
State Street was not alone in its efforts; indeed, major public pension funds had spearheaded the initial effort to increase board diversity. Following State Street’s announcement, BlackRock and Vanguard added their support, demanding greater female leadership at their portfolio companies. Other institutional investors took similar action. These efforts have had a dramatic impact in increasing the diversity of corporate leadership, at least at the board level. One empirical paper reports that engagement by the Big Three asset managers alone “led firms to add 2.5 times as many female directors in 2019 as they did in 2016,” accounting for at least a third to two-thirds of the “percentage of all public company board seats held by women…between 2016 and 2019.”
More recent efforts have extended diversity objectives beyond gender. Institutions have announced that their policies and objectives include greater racial and ethnic diversity, and they have supported proposals for increasing diversity and inclusion throughout the workforce, such as requiring companies to conduct racial equity audits and disclose their results.
In a new essay, I analyze institutional investor efforts to promote corporate diversity and, in particular, the rationale for these efforts. While it is tempting simply to applaud institutional investors for their success in promoting more diverse corporate leadership, I suggest that there are reasons for caution rather than unconstrained celebration. Although the normative case for greater corporate diversity is powerful, it stems from a range of distinct justifications. These justifications include economic arguments about the relationship of diversity to firm value, as well as noneconomic arguments about representation, justice, and equal opportunity. The rationale for promoting greater diversity has important implications for the form that diversity should take, as well as what types of diversity to prioritize.
Efforts to promote greater diversity can also pit the interests of one identity group against another, particularly when, as with boards, positions or opportunities are limited. Competition among identity groups for limited opportunities is at the heart of pending litigation over the role of diversity in, for example, college admissions. Broad-based diversity initiatives in the selection of directors may also compete with other economic and societal priorities.
In this debate, the role of institutional investors is complicated by their status as intermediaries that manage other people’s money. While one may plausibly argue that institutional investors act pursuant to delegated authority when they engage with portfolio companies to pursue economic objectives, the claim that beneficiaries delegate to asset managers the authority to pursue ethical or social objectives is less clear. As a result, the debate over corporate diversity has overwhelmingly focused on the business case for diversity. Challenges in empirically analyzing the relationship between diversity and firm economic value, however, make it difficult for institutional investors to defend their initiatives purely in economic terms.
The case for corporate diversity extends beyond any demonstrable impact on firm economic value, however, and has its roots in both business and societal rationales. As the essay explains, there are powerful arguments that the societal benefits of diversity are at least as compelling reasons to promote corporate diversity, equity and inclusion initiatives as firm-specific economic justifications are. The challenge is that societal justifications for diversity span a broad range – from remedying past discrimination and increasing representation of viewpoints and experiences to promoting role models. These justifications lead to different conclusions about which groups should be included in diversity efforts and how greater inclusion should be structured and prioritized. The societal justifications for diversity do not provide guidance about how to create categories and navigate trade-offs.
The issue is complicated when these decisions are made by institutional intermediaries. Although such institutions wield considerable influence due to their large shareholdings, they represent the economic interests of their beneficiaries who typically have little or no say in institutional voting or engagement decisions. At the same time, both institutional investors and the fund managers who act on their behalf face political and social pressures that influence their engagement choices and create potential agency problems. In addition, growth and concentration in the asset management industry have produced a small number of institutional investors that exercise substantial power over social policy, raising questions about whether their exercise of that power is legitimate.
Although these concerns present challenges for institutional engagement across a wide range of social and political issues, diversity is distinctive. Different investor perspectives about the rationale for diversity are likely to result in meaningfully different preferences that cannot readily be aggregated. An investor focused on remedying discrimination or increasing opportunity, for example, might prioritize increasing the total number of minority or women corporate directors. An investor whose goal is reducing groupthink may focus instead on bringing some level of diversity to the boards of all companies. Yet another investor who is concerned about workplace culture might place particular weight on diversity in industries that have traditionally been dominated by white men. Given a choice of where to focus their efforts, these investors are going to make very different choices.
Rather than reflecting those differences, today’s institutions are promoting their own visions of diversity without seeking to determine whether those visions correspond to the preferences of their beneficiaries. Moreover, there is a societal cost to delegating to investors the responsibility for addressing moral or ethical issues. Giving investors the authority to determine what inclusion means in corporate leadership takes these deliberations outside the political process, reduces the input of other members of society, and, to a degree, may relieve pressure on courts and legislatures.
The essay concludes by identifying two potential corporate governance solutions to this dilemma. The first is to limit the role of institutional intermediaries in addressing corporate diversity. Although this approach would address concerns about accountability and legitimacy, it would sacrifice the powerful impact of institutional engagement with respect to diversity. The second solution is to require institutional intermediaries to ascertain the views of their beneficiaries and incorporate those views into their voting and engagement decisions, an approach that Jeff Schwartz and I term “informed intermediation” and develop further in other work. With respect to an important and potentially controversial issue such as diversity, informed intermediation offers the potential to retain the important influence of institutional engagement while increasing its accountability and legitimacy.
 Nel-Olivia Waga, International Women’s Day 2017: Wall Street Meets ‘The Fearless Girl’, Forbes (Mar. 3, 2017), https://www.forbes.com/sites/neloliviawaga/2017/03/07/international-womens-day-2017-wall-street-meets-the-fearless-girl/?sh=2c1de6235b17
 Bethany McLean, The Backstory Behind That ‘Fearless Girl’ Statue on Wall Street, The Atlantic (Mar. 13, 2017), https://www.theatlantic.com/business/archive/2017/03/fearless-girl-wall-street/519393/
 See Todd A. Gormley, Vishal K. Gupta, David A. Matsa, Sandra C. Mortal & Lukai Yang, The Big Three and Board Gender Diversity: The Effectiveness of Shareholder Voice, J. Fin. Econ. (forthcoming), (Apr. 3, 2023), https://ssrn.com/abstract=3724653. The impact on C-suite diversity, particularly positions such as CEO and CFO, has been less significant. Women and racial minorities continue to have very low levels of representation in these positions. David F. Larcker & Brian Tayan, Diversity in the C-Suite: The Dismal State of Diversity Among Fortune 100 Senior Executives, Stanford Closer Look Series. Corp. Governance Res. Initiative, 3 (Apr. 1, 2020), https://www.gsb.stanford.edu/faculty-research/publications/diversity-c-suite.
 Gormley, Gupta, Matsa, Mortal & Yang, supra note 3 at 38.
 See Adam Liptak & Anemona Hartocollis, Supreme Court Will Hear Challenge to Affirmative Action at Harvard and U.N.C., N.Y. Times (Jan. 24, 2022), https://www.nytimes.com/2022/01/24/us/politics/supreme-court-affirmative-action-harvard-unc.html (describing litigation in which the Supreme Court will hear claims in the University of North Carolina case that “the university discriminated against white and Asian applicants by giving preference to Black, Hispanic and Native American ones.”)
 See, e.g., Jonathan Klick, Review of the Literature on Diversity on Corporate Boards, American Enterprise Institute (Apr. 6, 2021), https://www.aei.org/research-products/report/review-of-the-literature-on-diversity-on-corporate-boards/.
 See, e.g., Jeff Schwartz, ‘Public’ Mutual Funds, in Cambridge Handbook on Investor Protection 42 (Arthur Laby ed., 2021).
 See, e.g., John C. Coates, The Future of Corporate Governance Part I: The Problem of Twelve (Sept. 20, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3247337.
 Jill E. Fisch & Jeff Schwartz, Corporate Democracy and the Intermediary Voting Dilemma, Tex. L. Rev. (forthcoming 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4360428.
This post comes to us from Professor Jill E. Fisch at the University of Pennsylvania Law School. It is based on her article, “Promoting Corporate Diversity: The Uncertain Role of Institutional Investors,” forthcoming in the Seattle University Law Review and available here.