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Disney seeks to avoid shareholder proposal on racial pay gap, but should it learn from Citi’s U-turn on racial equity audit?

Corporate law firm warns companies that they might find themselves in the ‘crosshairs’, as regulators, shareholders and legislators take an increasing interest in ESG issues like racial equity

US entertainment giant Walt Disney is seeking to exclude a shareholder proposal calling on it report on the existence of race or gender-based pay gaps between employees at the company. Disney’s lawyers have argued that the proposal, which was filed by US activist investor Arjuna Capital, breaches the US Securities Exchange Commission’s (SEC) ‘ordinary business’ rule.

A key argument in its ‘no action’ letter to the SEC – the mechanism by which a company seeks permission from the regulator to exclude a proposal – is that the resolution impinges on its everyday business, particularly as the company is fighting a lawsuit brought by current and former employees who allege that they were paid less than male colleagues. Disney argues in its letter to the SEC that such a pay gap report could be seen as an acknowledgement of that: “In effect, the Proposal requests that the Company provide current and future claimants with both an admission by the Company regarding the possible existence of a ‘pay gaps across race and gender’ and risks related thereto and a roadmap for establishing claims pursuant to that admission.” 

But given the shift seen at the regulator since President Biden came to power – most recently encapsulated in last week's guidance on the ‘ordinary business’ rule (Rule 14a-8(i)(7)) – could Disney’s attempts be misplaced, and should it learn from Citi’s reversal on a request by shareholders that it undertake an independent racial equity audit proposal? 

Late last month, the US banking giant announced it would undertake such an audit, despite opposing it last year when it was requested by US-based CtW Investment Group – now SOC Investment Group – in a pioneering proposal that garnered 39% support from shareholders. 

To the surprise of many, the SEC denied attempts by companies, including several big financial institutions like Citi, to exclude racial equity audit proposals during the last proxy season. 

In a blog, Citi’s Executive Vice President, Edward Skyler, said the audit would be a demonstration of the bank’s “ongoing support for measurement and transparency” on the issue.

So what prompted the U-turn by Citi? Tejal Patel, Corporate Governance Director at SOC Investment Group, told RI that she thinks the change of heart was down to a combination of factors, but the significant shareholder support for the proposal played an important role.  

“I think that the really critical moment happened when the votes came in, because the vote provided a kind of litmus test, if you will, of how important that was as an issue to shareholders”, she said. 

When asked why Citi had changed its position on the audit, a spokesperson directed RI to the passage in the blog that said: “Conducting an audit of our ARE [Action for Racial Equity] initiative will help us assess the impact our work is having and will help inform how to adapt and grow our work to address the racial wealth gap”.   

Citi’s Skyler noted in this section of the blog that the bank “received valuable input from SOC Investment Group” and added that: “Engaging with our shareholders is an important part of how we continue to evolve and strengthen our Environmental, Social and Governance practices, and we're confident the dialog we've begun with SOC will strengthen our work to help address the racial wealth gap.” 

Politicians in the US are taking a greater interest in the issue too. A month after the proposal went to vote at Citi, the bank’s CEO Jane Fraser was asked about it by the US Government’s House Committee on Financial Services. She was one of six CEOs of the US’s largest banks attending a hearing in May. 

Also at the hearing was Jamie Dimon, CEO of JP Morgan & Chase, which was hit with a racial equity audit proposal too. He reportedly said that he remained staunchly opposed to it, stating it would add only “bureaucracy and B.S.” to the firm’s efforts to help communities of colour. Close to 40% of shareholders backed the proposal at JP Morgan.  

New York corporate law firm Olshan Frome Wolosky, however, recently warned big companies that they “should stay informed on Racial Equity Audits and their adoption, crafting and implementation”. 

In an article published in September, the law firm stated that: “If a company lags behind in this quickly developing area, we believe that shareholders may become more willing to launch shareholder campaigns focused on ESG issues, including demanding objective results through Racial Equity Audits. 

The paper also mentioned that the US Government’s House Financial Services Subcommittee on Diversity and Inclusion is “currently reviewing legislation that would require banks to conduct Racial Equity Audits every two years in an effort to promote diversity and equity”. 

Speaking more broadly on ESG issues, Olshan warned: “Companies that dismiss these concerns or lag behind their peers in addressing ESG matters may find themselves in the crosshairs of investors and proxy advisory firms, or even state legislatures and federal agencies.” 

SOC’s Patel told RI that it plans to file more audit proposals this year and is still “evaluating the list of [target] companies”. She added that other shareholders she knew of are also planning to file similar proposals.  

On Citi’s planned audit, which is expected to get underway in January, Patel said that SOC is “very happy” – although she tempered her enthusiasm by acknowledging that it’s still not clear what the final report will look like, but she said she was hopeful. 

Citi, however, is not alone in committing to undertake a racial equity audit. Last year, the world’s largest asset manager BlackRock and US private prison operator CoreCivic also agreed to do so, prompting proposals at both being withdrawn. 

Actions like these create a precedent, and Olshan wrote in its article that as such audits become an increasing focus for investors “it is possible that the SEC and the major exchanges may eventually require companies to make further diversity, equity and inclusion disclosures”. 

The SEC is currently working on a proposal for a sustainability-related disclosure rule for companies under its purview, which is expected to be unveiled before the end of the year. In the summer, the regulator approved Nasdaq’s push to require companies listed on its stock exchange to meet certain minimum diversity targets on their boards. 

The SEC has not yet ruled on Disney’s request to exclude the pay gap proposal, but last week it said that going forward it would assess Rule 14a-8(i)(7) challenges based on the significance of the social policy issue in the shareholder proposal rather than its significance to a particular company – a correction, it said, to its interpretation in recent years under President Trump’s Administration.

Under President Biden’s Administration the impact of companies on the environment and society is facing scrutiny like never before. If the racial equity audit proposals, which have attracted the attention of legislators, regulators and investors, are a bellwether for companies then perhaps companies might need to pause before attempting to exclude ESG proposals like those on race and gender inequalities as Disney is attempting to do.  

Disney had not reponded to a request for comment at the time of publication.