Board diversity has become an increasingly hot-button issue in the past several years, an observation that will come as no surprise for anyone following corporate governance. A few years ago, advocacy groups and pension funds started building initiatives around board diversity, which progressed to more overt discussion around the critical influence of board composition on shareholder evaluations from the largest institutional investors. In 2017, this has culminated with explicit guidelines and voting behaviors from the world’s largest asset managers.
Coupled with the fact that research has repeatedly shown that companies with diverse boards perform better, qualitatively a variety of perspectives opens conversation and brings in additional viewpoints that expand the ways of thinking from the top down at an organization. Despite these trends, progress continues to be slow.
Senior Advisor, Board Governance
KPMG’S BOARD LEADERSHIP CENTER
SEMLER BROSSY CONSULTING GROUP
In response to these market factors, as well as in an effort to represent a diversifying base of shareholders, employees and customers, many companies are making the effort to disclose the diverse backgrounds and experiences of their board.
Data on board diversity is scant, given that there is no requirement to disclose this information about directors. Former SEC Chairwoman Mary Jo White brought this issue to the forefront during her tenure, suggesting that rules be set to provide more information about executives and board members. But those regulations never made it to the proposal stage, and with the current Commission focused on other regulatory issues, it does not seem likely to be on the agenda for some time again.
Meanwhile, U.S. House of Representatives Congresswoman Carolyn Maloney from the state of New York proposed a bill in March 2017 called the “Gender Diversity in Corporate Leadership Act.” According to Maloney’s announcement, “the new legislation [is] modeled on policies in Canada and Australia [and] would instruct the SEC to recommend strategies for increasing women’s representation on corporate boards. The bill also requires companies to report their policies to encourage the nomination of women for board seats as well, as the proportion of women on their board and in senior executive leadership.”
With no official movement on these initiatives, the investor community and the public at large is left with what companies voluntarily share about the composition of their boards. The good news is that more than 40% of companies in the Equilar 500—a group of companies comprising the largest U.S.-listed public companies by revenue, weighted by industry sector to resemble similar large-cap indices—disclose some level of diversity on their boards of directors. Just over 45% of companies disclose composition with respect to gender, and 39.8% of companies disclose diversity in terms of ethnicity or race (Figures 1 & 2).
These disclosures can vary widely, but they all explicitly included information that pointed to the number or percentage of directors that have a diverse background in these categories.
For example, disclosures such as UPS specifically included the background of individual directors:
“Our 12 director nominees include a diverse range of individuals, including three women, one African-American, two nominees who are European and a nominee who spent his entire career in Asia. We also have a great degree of age diversity among our nominees, with our directors’ ages ranging between 46 and 71 years.” (Proxy statement filed 3/13/17, p.13)
Meanwhile, others had a more general overview, such as Johnson & Johnson:
“Diverse Identities = 50% Women, Hispanic, and African-American Nominees” (Proxy filed 3/15/17, p.15)
Regardless, these types of disclosures—while not yet a majority—have become relatively common.
“Study after study has demonstrated an association between business results and boards that include women, and investors are actively engaging with companies on gender diversity in light of this research,” said Susan Angele, Senior Advisor, Board Governance, KPMG’s Board Leadership Center.
When broken down by industry sector, the results varied. The industrial goods sector was unique in the fact that half of companies disclosed gender diversity in board composition. Industrial goods companies were also the second-most prevalent to disclose ethnic and racial diversity, trailing healthcare by a small margin. Meanwhile, the basic materials sector—which includes energy and oil and gas companies—was the least likely to disclose any form of diversity. Notably, fewer than one-third of consumer goods companies disclosed racial or ethnic diversity on their boards, the only other sector besides basic materials to be lower than the overall index average (Figure 3).
One criticism that has been levied by shareholders is that many companies don’t include pictures of their directors, which, while not sufficient for discerning a person’s background or diversity profile, helps visually represent who the individuals are and provides yet another piece of information. Since shareholders are not in the boardroom, they are interested in as much detail about board candidates as possible. Among the Equilar 500, 57.1% of companies included images of their directors, which again varied by sector.
“If it once was a check-the-box exercise, board diversity is now a business priority,” said Blair Jones, Managing Director at Semler Brossy Consulting Group. “Boards understand the importance of diversity in fostering better conversations, better representing employee and customer perspectives and driving better results. Boards want the benefit of diverse experiences, and are becoming more open to sourcing them from less traditional backgrounds.”
Regardless of how boards are reacting to their investors’ calls for transparency, the question remains with respect to results. At least in terms of gender diversity, there has been progress. In 2017, 20.9% of board seats were occupied by women at the largest U.S. companies by revenue, compared to 16.5% five years earlier. For the Russell 3000 as a whole, that figure stands at 16%, up from about 12% in 2013 (Figure 4).
“There was a time when getting 20% of women on boards might have seemed an audacious goal, but now that goal has been reached for Equilar 500 boards overall and seems in sight for the Russell 3000—that achievement should be celebrated,” said Jones. “At the same time, it is not time for boards to rest on their laurels, as gender parity is the ultimate goal, and the current pace of change has that milestone still quite a ways away.”
However, digging slightly deeper into the data, women are far less likely to be in leadership positions. Just 8.4% of the top roles on corporate boards at large-cap companies were female, and only 5.6% at all Russell 3000 companies (Figure 5).
While more women are being added to boards, oftentimes lead director and non-executive chair positions go to directors who have a long history and tenure with the company. This makes logical sense, and as women become more entrenched in board positions, over the years we should expect these trends to accelerate. But in the meantime, boards have the opportunity to lay groundwork and close this gap by making sure their pipeline of diverse candidates is full. By grooming new directors on the board and providing the opportunity to serve committee or other leadership positions, that may open more doors for more diverse leadership.
“While racial and ethnic diversity are equally important to strong business results, there have historically been challenges to similar research due to smaller sample sizes and lack of disclosure,” said Angele. “As an additional measure of diversity, sexual orientation has even less visibility. The research does show that diverse teams tend to perform better overall, and as disclosure of these facets of diversity becomes more common, the amount of research confirming the association between board diversity and long-term value is likely to increase.”
Dan Marcec is the editor-in-chief of C-Suite and the director of content at Equilar. He can be reached at firstname.lastname@example.org.