Corporate Governance: Board Diversity
May 21, 2019
Corporate Governance: Board Diversity
Introduction
employees, officers, or direct stakeholders in the company)
A public company’s board of directors is a group of
and outside or independent directors (board members with
individuals who have been elected to be the company’s
no affiliation with the company), who are generally the
fiduciaries on behalf of its shareholders. Along with
majority of directors on a board.
company executives—such as the chief executive officer
(CEO)—who run the company on a daily basis, the board
Historically, public company boards were the exclusive
helps set the tone for the corporation. Board mandates
preserve of white males. For example, a 2013 study by
include assisting in setting broad corporate objectives,
Larcker & Tayan reportedly found that the average
hiring and firing the CEO, who primarily runs the company,
company in the Fortune 250 stock index did not have a
and providing support for senior management. Key board
single female director until the mid-1980s. In 2008, women
committees include the compensation committee
reportedly held 13% of the board seats in the S&P 1500
(responsible for setting pay packages for key executives),
Stock Index (which tracks nearly half of public firms). In
the nominating and governance committee (responsible for
2017, that percentage increased to 19%. Nevertheless, a
ensuring that there are quality candidates running for the
2016 report from the Government Accountability Office
board), and the audit committee (responsible for overseeing
(GAO) observed that “assuming that women join boards in
financial reporting).
equal proportion—a proportion more than twice what it
currently is—we estimated it could take about 10 years
Congressional and policy interests in corporate boards have
from 2014 for women to comprise 30 percent of board
increased in recent years, with one primary issue being the
directors and more than 40 years for the representation of
composition of the directors of the board. In particular,
women on boards to match that of men.”
there has been a sustained movement for increased gender
diversity on corporate boards. Supporters argue, among
SEC Disclosure Requirements
other things, that opening the pool of prospective directors
In 2009, as part of its statutory mission of investor
to an underutilized group of often highly qualified female
protection through corporate disclosure, the Securities and
leaders would bring fresh, unique, and innovative
Exchange Commission (SEC) promulgated rules requiring
perspectives to boards and their companies, and that
corporate disclosure on “whether, and if so how, the
research by Credit Suisse and others has found that firms
nominating committee (or the board) considers diversity in
with diverse boards tend to perform better financially.
identifying nominees for director [and] [i]f the nominating
Opponents argue, among other things, that academic studies
committee (or the board) has a policy with regard to the
have not replicated these findings and that boards owe their
consideration of diversity in identifying director nominees.”
primary duty to maximize shareholder value rather than to
promote various social goods.
In subsequent years, the SEC disclosure requirements have
been widely criticized for their limited utility by SEC
During the last decade or so, large companies have felt
officials, members of the investor community, and a 2016
increased pressure from pension funds (such as CalPERS
GAO report, among others. A major concern is that many
and CalSTRS) and large asset managers (such as State
firms do not include factors such as gender, race, or
Street and Blackrock) to adopt more gender diverse boards.
ethnicity in how they define diversity.
Some countries, such as Norway and Germany, have
enacted laws requiring gender diverse boards, and the state
In early 2019, the SEC staff issued new corporate guidance
of California recently enacted a similar requirement. This In
on board diversity disclosures. The guidance said that when
Focus examines key policy developments relating to gender
making a decision about nominating a particular person to
diversity on corporate boards, including regulatory
be a director, to the extent that a board considers that
requirements, and efforts to increase gender diversity on
person’s self-identified diversity characteristics such as
boards in states and other countries. It also describes
race, religion, and gender, the [SEC’s] expectation was that
various opposing views on the topic. Although the issue has
“the company’s discussion required by [the disclosure
primarily focused on gender diversity to date, movements
regulation] would include, but not necessarily be limited to,
exist to increase board representation of other groups as
identifying those characteristics and how they were
well.
considered.”
Gender Diversity on Corporate Boards
California and Other States
There are some 3,500 public companies in the United
On September 30, 2018, then-California Governor Jerry
States. Each one has a board of directors with between 3
Brown signed SB 826 into law, making the state the first to
and 31 members (on average about 9). Directors are usually
enact board diversity quotas. Under the law, all stock
split between inside directors (board members who are
exchange-traded California-based companies are required
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Corporate Governance: Board Diversity
to have at least one woman on their board by the end of
There is, however, research linking heightened board
2019. By the end of July 2021, firms with five-person
diversity to a number of nonfinancial corporate benefits.
boards must have a least two female directors and those
For example,
with six-person boards must have at least three. Failure to
comply triggers the imposition of money penalties.
A 2018 study by Banahan and Hasson compared S&P
500 Stock Index firms with boards containing three or
Proponents of the board quota, including women’s groups,
more women with firms whose boards had two or
cited research that found that increasing female directors
fewer women. It found that the firms with more gender
would benefit the California economy in many ways.
diverse boards outperformed their counterparts on
Critics, including dozens of business interests—such as the
environmental, social, and governance metrics—
California Chamber of Commerce—argued that the law
nonfinancial performance indicators that include
conflicts with existing California civil rights laws because it
sustainable, ethical and corporate governance issues.
requires a person to be promoted, while disqualifying
another candidate at the same time. Another concern is that
Research published by Adams and Ferreira in 2009
Delaware-chartered firms based in California, of which
suggested that female board members may be superior
there are many, would be subject to the California statute.
monitors of senior executives.
Some observers consider this unfair because corporate
Work published in 2018 by Kamalnath indicated that
governance issues such as board composition are typically
greater board diversity may help mitigate the prospect
governed by the laws of the state in which a corporation is
of potentially harmful board “groupthink.”
chartered, not where it is physically located. The chamber
also reportedly criticized the way in which the legislation
The 2014 MSCI Executive Summary of Women on
prioritizes gender over other dimensions of diversity, such
Boards found that firms with boards with more than
as ethnicity. The group, however, may be unlikely to
average levels of female directors may be less prone to
support board quotas based on ethnicity or any other
bribery, corruption, and fraud.
demographic attributes. Many observers expect lawsuits to
be filed challenging SB 826.
Lisa Fairfax, a corporate governance expert and law
professor at the George Washington University Law
Some observers say that one potential legacy of the
School, advocates that nonfinancial board diversity benefits
California law is likely to be its effect on other states, a
provide robust support for efforts aimed at expanding board
development that already appears to be in progress. As of
diversity. In this context, Professor Fairfax thinks that there
early April 2019, two states, New Jersey and
has been too much emphasis on “business rationales” for
Massachusetts, were reportedly considering bills along the
board diversity and too little appreciation for “social and
lines of the California statute.
moral justifications for board diversity efforts.”
Board Diversity Mandates Globally
Fairfax’s view is consistent with the so-called stakeholder-
Beyond the United States, other countries—largely
centric view of capitalism wherein companies are said to be
European nations—have mandated certain levels of board
responsible for multiple stakeholders—not just
gender diversity. A precedent for the practice began in 2003
shareholders, but also workers, suppliers, and their
when Norway first required that its corporate boards be
communities, etc.
composed of at least 40% female directors. Since then,
Germany, Spain, and France are among the nations that
The stakeholder-centric view largely stands in contrast to
have imposed minimum requirements for female board
the aforementioned shareholder-centric view, a more
representation.
orthodox perspective embraced by many, including SEC
Commissioner Hester Peirce. Commissioner Peirce, the first
Research and Varying Views on the
federal official to publicly come out against the California
Benefits of Board Diversity
law, observed that “The California legislation effectively
The so-called shareholder-centric view of capitalism is the
forces corporations, including non-California corporations,
conventional notion that a company’s only stakeholders are
to consider all women as stakeholders. That is a big group...
its shareholders. Under that view, the role of the board of
We have a deep and well-developed body of corporate law.
directors is to provide value for the company’s
It rests on the assumption that the board owes its principal
shareholders. In 2016, studies by Credit Suisse, the
duty to the shareholders collectively, not to an amorphous
investment bank, and McKinsey and Company, the
group of stakeholders….”
consulting firm, found that diverse boards lead to
improvements in a firm’s profitability. Research conducted
Legislation in the 116th Congress
by academics, however, has frequently not supported that
H.R. 1018 (Meeks) and S. 360 (Menendez) would require
view. For example, two meta-studies—studies of related
public companies to disclose the gender, race, and ethnicity
multiple studies—by Post and Byron (2015) and by Pletzer,
of their board members and their plans for achieving board
Nikolova, Kedzior, and Voelpel (2017) found that greater
diversity.
board diversity had an insignificant impact on a company’s
financial status.
H.R. 1611 (Maloney) would require publicly traded
companies to disclose their board members’ gender.
Gary Shorter, Specialist in Financial Economics
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Corporate Governance: Board Diversity
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