The market is calling for more diversity on public company boards of directors, but even the largest companies on the leading edge have not yet heeded the call.
In the past several years, corporate governance stakeholders have become more attuned to board composition in terms of gender, racial and ethnic diversity. Proponents and advocates for a wider range of demographic backgrounds not only champion the value of various experiential perspectives, but also as a practical matter, they recognize that diverse boards are more representative of the increasing diversity of these companies’ employees, investors and customers.
“Throughout our society there’s been an increase in awareness and focus on diversity in general, and that’s clearly the case in most businesses as well,” said Steve Odland, President & CEO of the Committee for Economic Development (CED). “In the business world, companies are placing immense emphasis on making sure that the makeup of their employee base reflects their communities and their customers—we see more and more boards following suit.”
Though the commitment to diversity is there in word, in deed there has been slow progress. For example, women accounted for 21.3% of S&P 500 board seats in 2016, according to a recent report from Equilar. That represents an increase of fewer than five percentage points since 2012, when approximately one-sixth of all director seats were occupied by females (Graph 1).
“Companies around the world are paying more attention to board diversity, and when so much activity is happening, it leads us to ask how do we stack up,” said Brande Stellings, Vice President, Corporate Board Services at Catalyst. “Other countries are pulling ahead, and the mantra for decades was to give it time— women are graduating from college in higher numbers and the cream would rise to the top so there’s no need to be proactive. Time has not been sufficient, so there is impatience.”
There’s more than meets the eye in terms of gender diversity as well. The overall numbers are up, but leadership positions are still low. Just 7.6% of all S&P 500 board leadership positions—CEO-Chair, non-executive chair or lead director—were filled by females in 2016. That is an increase from 5.6% in 2012, but it still falls well behind the overall percentage of women on boards, and of course, far beneath levels of parity.
“The first step was getting women on boards, and now that women are on boards in larger numbers, there should naturally be more opportunities for them to serve as non-executive chairs or lead directors,” said Blair Jones, Managing Director of Semler Brossy, who contributed independent commentary for the recent Equilar report, Board Composition and Recruiting Trends 2016. “Barriers can exist where there is not a natural rotation that opens up chair slots, or tenure dictates chair or lead director designations ahead of skill sets.”
While the SEC has recently considered proposals that would require disclosure of various diversity attributes for public company boards, this chatter remains idle and has not gained momentum that would point to expectations of a forthcoming rule yet. As a result, information about ethnicity and race among directors is limited to what companies voluntarily disclose in their annual proxy statements.
According to Equilar data, a majority of S&P 500 companies—or 61.0%—disclosed that they “consider ethnic or racial diversity” when assessing the board or director candidates. However, disclosures of that type are often limited to boilerplate language inclusive of little more than an acknowledgment. A much smaller number of S&P 500 companies disclosed the actual composition of their current board in terms of ethnicity or race—a total of 12.8%, or 64 companies (Graph 2).
Furthermore, as the corporate landscape continues to evolve, so have the skills required on the board of directors. Most companies expect directors to have at least some level of executive and/or financial experience in their past, but as new considerations create greater risks, boards are cultivating an array of experience from a diverse set of directors to engender more comprehensive oversight. Moreover, they are also disclosing this information more readily in order to show their investors and other stakeholders they are taking these new risks seriously.
“Investors’ call for board refreshment and interest in board diversity have placed this issue front and center for most companies, and best practice among nominating and governance committees is to conduct a skills audit to understand the skills possessed by current directors and skills that are not yet addressed, with the objective of keeping the portfolio of board skills contemporary and relevant,” said Jones. “Frequently the gaps are gender- or race-based, but the gaps also may reflect industry expertise, financial expertise, marketing expertise, or increasingly, technology—particularly cybersecurity.”
A case in point, the number of companies that include a board skills matrix in their proxy statements has nearly doubled in the past year from just 32 companies in the S&P 500 in 2015 to 63 in 2016—or 12.6% of the total. The skills matrix typically manifests as a visual representation of experience and qualifications for the directors up for nomination at the upcoming annual meeting. While a director biography includes an individual’s qualifications, skills matrices framing the skillsets represented on the board as a whole are becoming more common, and make assessing boards as a whole a simpler exercise.
Up until now, many boards that have fallen behind the diversity curve point to the fact that there are not enough qualified candidates available. An Equilar analysis conducted earlier this year in partnership with The U.S. 30% Club, found evidence to the contrary—approximately four in five females currently serving as public company executives had never served on a board.
“Many boards are committed to increasing diversity, but they cite difficulty in finding qualified candidates,” said S.K. Gupta, Managing Director and Co-Founder of Ascend Pinnacle, an initiative to increase the number of Pan-Asian corporate directors on public and large private company boards.
“If board members require experience as a Fortune 500 CEO to be on the board, then sure, there is a limited number,” said Odland. “We suggest that they broaden the criteria to include private board members, retiring audit professionals, legal experts, small business owners, and other senior C-suite members. If you broaden the scope even by a bit, the supply issue evaporates.”
Over the years, companies have looked for correlations to company performance as proof they need to seek board diversity. According to a Catalyst report “Why Diversity Matters,” there are 70 different citations showing that diverse teams, including boards, perform better. Although there has been over a decade of solid research to support the business case for gender diversity on boards, Stellings said, it has not proven sufficient to drive behavior change.
“Boards have control over the company’s strategic direction, and corporations are very important to everyday lives, so we think it’s important to see at least half of the population represented on the board,” she added.
Odland also noted that diversity is bigger than a performance issue, it’s a human capital issue. For example, women have a majority of advanced degrees and control a considerable portion of consumer spending. They’re very involved in investment decisions and have high net worth. Just under half the workforce is female. Yet, only less than 10% of top management and about 5% of Fortune 500 CEOs are women. They’re a majority, or close to one, of customers, employees and stockholders—every constituency except those making company decisions.
“Amid growing global competition, many boards are moving beyond the compliance role to emphasizing strategic planning for long-term innovation and growth,” added Odland. “More than ever before, boards comprised of broad diversity and thought will help companies to avert tunnel vision and be positioned for success.”
There may still be a long road ahead before reaching a tipping point. While there has been an increased commitment to mandatory retirement ages, and to a lesser degree, board term limits, a one-size-fits-all solution like that often precludes directors who should be on the board to stay on the board. Equilar data shows that less than 10% of S&P 500 directors were new to the board in 2016. That means about 500 seats opened in the past year—about one per company—and though 25% of those were occupied by women, it takes a while to make change.
“We’ll often see reproduction of what the system already looks like,” said Stellings. “It’s not really a bias against women, but it’s a bias in favor of who you know. It’s about the network, and you have to work to get in—it’s not like you just apply and you can get on there.”
Dan Marcec is C-Suite’s Editor-in-Chief and Director of Content at Equilar. He can be reached at email@example.com.