Double standards on corporate diversity initiatives undermine business success

Fostering workforces and leadership teams with diverse perspectives and backgrounds has become a priority across the American business landscape. Although government mandates on “Diversity, Equity, and Inclusion” receive much attention, as well as pushback, private sector approaches have a more constructive impact. Unfortunately, some bad actors threaten this progress.

Smart American businesses know that diversity can drive growth. Indeed, data shows that diversity broadly leads to better business performance and improves employee retention and recruitment. Having individuals from various backgrounds and perspectives on company boards of directors also drives profitability, increasing returns for investors.

For publicly traded companies, proxy advisory firms have come to play major roles in decisions at the board of director level, like proposals regarding strategy, governance, and indeed who is elected to the board itself. Investors, especially institutional investors, pay proxy firms to receive advice about shareholder votes.

But as they’ve grown, proxy firms are now wielding influence that is not always in the best interests of the companies they analyze.

Scholar Ben Zycher testified last year before Congress about the outsized role played by proxy advisory firms. Zycher explained that “regulatory actions by the Securities and Exchange Commission have created powerful incentives for firms and funds to retain proxy advisers and to adopt their recommendations, often on an automatic basis. The advisers themselves have weak incentives to consider the fiduciary interests of shareholders and fund participants, thus freeing them to indulge their own political preferences, at little or no cost to themselves.”

Recent actions taken 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 and invited controversy.

In both instances, ISS recommended alternative board nominees over highly qualified candidates proposed by the companies.

At Disney, Institutional Shareholder Services backed Nelson Peltz, an activist investor, over Maria Elena Lagomasino, an executive with extensive governance experience and a long tenure on Disney’s board. Disney touted Lagomasino’s expertise in global brands and governance as critical to their strategic goals, while ISS favored an investor primarily focused on financial restructuring. 

Similarly, at Masimo, Institutional Shareholder Services endorsed activist investor Politan Capital Management’s nominee William Jellison over Christopher Chavez, whose experience in the medical device industry, including achieving regulatory approvals, made him the ideal candidate in Masimo’s eyes.

The contrast illustrates a significant criticism of activist investors: By favoring their own narrow and short-term interests, activist investors like hedge funds often prevent companies from implementing changes that the companies see as benefiting employees, customers and long-term investors looking for stability.

The critical plot twist is that both candidates opposed by ISS are highly qualified Latinos, and that Institutional Shareholder Services has previously inserted itself in board decisions, actively pushing private companies to succumb to the demands of political activists in adopting Environmental, Social and Governance or ESG agendas, which often include diversity initiatives (albeit ones that revolve around rigid mandates).

The Disney and Masimo situations reflect a broader, systemic issue in how diversity is being prioritized — or neglected — by influential entities like Institutional Shareholder Services and business in general. 

Diversity is not just a checkbox to be ticked. It is now a cornerstone of effective leadership and decision-making in today’s interconnected world. Latino representation on corporate boards is not just about numbers, it’s about bringing unique perspectives to the table—ones that reflects the experiences of a substantial and rising portion of our population. 

U.S. Latino consumers are a significant economic force, commanding a $2.6 trillion GDP and driving consumption growth in virtually every mass consumer category. Despite these eye-opening economic contributions, and making up nearly 20 percent of the U.S. population, Latinos held just under 4 percent of board seats among Fortune 1000 companies in 2021. Clearly, more can be done — in the right ways.

Bypassing highly qualified Latino candidates is certainly not a constructive approach, and instead perpetuates the very inequities that diversity initiatives are supposed to address. The rejection by Institutional Shareholder Services of qualified Latino candidates demonstrates a hypocrisy that needs to stop.

True diversity in business leadership is essential to serving customers and reflecting the communities that businesses serve. But constructive diversity measures cannot be about fulfilling a mandate, they must be about recognizing and valuing the critical role that diverse leadership plays in driving innovation, understanding markets and promoting prosperity for all Americans.

Mario H. Lopez is the president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity and prosperity for all.