Proxy advisors split over racial equity requests at banking giants

Glass Lewis backs shareholder call for independent audit on racial inequality at Citi and Bank of America

US proxy giant Glass Lewis has thrown its weight behind a shareholder proposal calling on US financial heavyweights Citigroup and Bank of America to undertake racial equity audits to assess any “adverse impacts on nonwhite stakeholders and communities of colour”.

The influential proxy advisor has told clients that such an audit “would help to identify and mitigate potentially significant risks” in its advice ahead of the banks’ annual meetings later this month. 

Tejal Patel, Corporate Governance Director at CtW Investment Group, the US manager behind the proposals, welcomed Glass Lewis support, which she described as “fairly unique”.

“I don't believe that a proposal of this type dealing specifically with racial equity has been supported by Glass Lewis [before]”, she said.  

Glass Lewis’ rival ISS Governance, which has arguably been the more inclined towards ESG proposals of the two in the past, has recommended a vote against the audit at both banks, arguing that both are taking “sufficient meaningful actions to address the issue”. Both Citigroup and Bank of America, for example, unveiled billion dollar initiatives last year on addressing racial inequality. 

But Patel told RI that she felt that ISS had misunderstood the objective of the proposal. “Their analysis was much more heavily on the existing steps that Citi or Bank of America are taking. We're not asking for disclosure of what the existing steps are, there's a lot of disclosure. What we're asking for is an independent evaluation of the effectiveness of these policies to combat systemic racism”, she said. 

Patel added that if the proposal was simply about disclosure, it wouldn’t have made it through the US Securities and Exchange Commission’s (SEC) ‘no action’ process, which in part decides whether a proposal has already been substantially implemented by a company, and can therefore be struck off the ballot. 

Both Citigroup and JP Morgan Chase attempted to use this argument to block the racial equity audit proposals, but the regulator – which has been far more amenable to such proposals this year under Biden’s presidency – rejected their arguments, as well as that of JP Morgan, which claimed the proposal constituted micromanagement. 

“The SEC recognised the proposal was not about additional transparency or about steps that are being taken, it's really about measuring the effectiveness of the policies themselves”, Patel said. 

CtW and US labour union SEIU filed racial equity audit proposals at eight US financial giants this year. Last week, the duo achieved a significant win at BlackRock and Morgan Stanley when both agreed to undertake diversity reviews, prompting a withdrawal of the proposals. 

Racial injustice is high on the agenda this proxy season after the killing of George Floyd last May and the impact of the Black Lives Matter movement.

Alluding to the “events of the last year” and “broad societal changes”, Glass Lewis stated in its advice on the banks that “it is particularly important for consumer-facing companies, such as the Company, whose operations heavily rely on and engaged workforce and their customers' trust and loyalty, to address issues of racial equity, including those raised by this proposal”.

It adds, “we believe that it is in shareholders' best interests for the Company to proactively identify and mitigate risks that could result in such adverse outcomes”, including, “customer and employee attrition, negative press, significant fines, and regulatory inquiries”.

When asked if Patel thought Glass Lewis’ support will translate into large support at the banks’ annual meetings later this month, she said she was “hopeful”, but noted that the proxy firms’ advice is just a recommendation and that investors set their own voting guidelines. 

Last year, however, votes at oil majors appeared to be strongly correlated with the degree of support from ISS and Glass Lewis. For example, climate proposals at Aussie oil giants Santos and Woodside broke records in the country after both proxy firms took the unprecedented step of supporting them. 

Bank of America’s annual meeting takes place on the 20 April and Citi’s on the 27 April. Both banks are calling on shareholders to vote against the racial equity audit proposals. 

Last month, it was announced that Glass Lewis was being sold by the Ontario Teachers’ Pension Plan Board (OTPP) and Alberta Investment Management Corporation (AIMCO) to private equity firm Peloton Capital Management and Canadian entrepreneur and Peloton Chair, Stephen Smith.