As reported by the WSJ, a new milestone has finally been reached for board gender diversity: there are no longer any companies in the S&P 500 with all-male boards!
Reaching just that one milestone has not exactly been expeditious. According to the WSJ, one in eight S&P 500 boards was all male in 2012. In 2019, women hold 27% of all S&P 500 board seats, up from 17% in 2012—certainly an improvement, but still far from anyone’s idea of gender parity. Progress seems to be even slower among companies in the Russell 3000 where, the WSJ reports, as of the first quarter of 2019, 376 companies still had all-male boards (19.3% women overall), reflecting a decrease from 457 in the fourth quarter of 2018 (18.5% women).
According to an ISS publication on U.S. Board Diversity Trends in 2019, 45% of new board positions among the Russell 3000 were filled by women in 2019, up from 34% in 2018, and a substantial improvement compared to only 12% in 2008. Moreover, in contrast to “previous years, when the percentage of new female directors was higher at large-capitalization companies, the high rate of new female directors—at almost parity—is consistent across all market segments.” This shift may reflect, in part, various initiatives by large asset managers, such as BlackRock and State Street, seeking to impose, through their votes, their own mandates for more board gender diversity. (See this PubCo post and this PubCo post.) ISS also attributes some of the change to California’s new board gender diversity mandate, affecting almost 700 companies. (See this PubCo post and this PubCo post.) The WSJ reports that, of “the 94 public companies in California with all-male boards when the law passed in late 2018, about 60% have added at least one woman to their boards since….”
This article in The Washington Post contends that, notwithstanding the achievement among the S&P 500, the “near eradication of all-male boards among America’s largest publicly traded companies disguises the challenges ahead as boards try to move closer to parity.” For example, “recent research has shown that boards tend to practice a sort of ‘twokenism,’ diversifying to a point where they meet what’s considered the norm and then appear to do less to raise the numbers. Another study from 2013 found that first-time female directors—as well as minority directors—tend to receive far less mentoring about boardroom norms than white men, making other appointments less likely and shorter tenures by women or minorities more likely.” In addition, “some worry that so much emphasis on any link between gender diversity and financial performance could create heightened expectations. ‘What kind of pressure does that place onto shoulders of diverse directors?’”
To be sure, the article reports that the “results from social science research are mixed, according to meta-analysis studies that review other research.” (See this PubCo post, which identifies some of the positive as well as the mixed results.) However, according to the article, “more diversity was shown to be linked to more corporate social responsibility and ethical behavior,” issues that increasingly resonate with investors. This recent GAO report, presented to the House Committee on Financial Services, also reflects those mixed results, but contends that board diversity increases the range of perspectives presented, enhancing the board’s decision-making process:
“For example, academic and business research has shown that the broader range of perspectives represented in diverse groups requires individuals to work harder to come to a consensus, which can lead to better decisions. In addition, research has shown that diverse boards make good business sense because they may better reflect a company’s employee and customer base, and can tap into the skills of a broader talent pool. Some research has found that diverse boards that include women may have a positive impact on a company’s financial performance, but other research has not. These mixed results depend, in part, on differences in how financial performance was defined and what methodologies were used.”
To gather views on the factors impeding diversity and potential strategies to address them the GAO conducted “semi-structured interviews” with various stakeholders, including CEOs, directors, investors and SEC officials.
The report identifies three factors that inhibit board diversity:
- Failure to prioritize diversity in recruiting efforts. Stakeholders told the GAO that “boards need to prioritize diversity during the recruiting process because unconscious biases—attitudes and stereotypes that affect our actions and decisions in an unconscious manner—can limit diversity. One stakeholder observed that board directors may have a tendency to seek out individuals who look or sound like they do, further limiting board diversity.” Some also expressed concerns about tokenism in light of some indications that board appointments of women slow down once one or two women are seated on a board.
- Limitations of the traditional candidate pipeline. Stakeholders told the GAO that directors “frequently relied on their personal networks to identify potential board candidates. Some stakeholders said that given most current board members are men, and peoples’ professional networks often resemble themselves, relying on their own networks is not likely to identify as many women board candidates.” In addition, limiting the candidate pool to the traditional career pipelines, where women are typically underrepresented, can also present challenges. The GAO previously found that “boards often appoint current or former CEOs to board positions, and that women held less than 5 percent of CEO positions in the S&P 1500 in 2014.…Expanding board searches beyond the traditional sources, such as CEOs, could increase qualified candidates to include those in other senior level positions such as chief financial officers, or chief human resources officers.”
- Low annual board turnover. The sluggish increase is also attributable to the relatively small number of board seats that become available each year, “in large part due to the long tenure of most board directors.”
The GAO report recommends a number of strategies designed to address these impediments:
- Set voluntary targets for the number or proportion of women or minorities to have on the board. Many stakeholders told the GAO that they preferred internal targets to externally imposed targets or quotas.
- Require a diverse slate of candidates, such as, as suggested by some stakeholders, aiming for slates that are half women and half men or at least, to avoid tokenism, that include more than one women. Tokenism was also a concern for a few of the stakeholders who were not supportive of the concept of seeking to mandate the composition of slates.
- Emphasis on the importance of diversity and diverse candidates by CEOs (setting the tone at the top) and investors and acknowledging the benefits of diversity. In earlier interviews, almost all of the stakeholders emphasized the important role played by investors in promoting diversity by exerting pressure on the companies in which they invest.
- CEO and director mentoring of women and minority board candidates, including outreach and sponsoring them for board seats.
- Improve information on board diversity, including improving SEC disclosure requirements on board diversity to increase transparency and potentially
“cause companies to think about diversity more. While the SEC aims to ensure that companies provide material information to investors that they need to make informed investment and voting decisions, [the GAO] found information companies disclose on board diversity is not always useful to investors who value this information. SEC leaves it up to companies to define diversity. As a result, there is variation in how much and the type of information companies provide publicly. Some companies choose to define diversity as including characteristics such as relevant knowledge, skills, and experience. Others define diversity as including demographic characteristics such as gender, race, or ethnicity…. In February 2019, SEC issued new guidance on its diversity disclosure requirements, which aims to clarify the agency’s expectations for what information companies include in their disclosures.” (See this PubCo post.)
- Expand board searches beyond the traditional pipeline of CEO candidates by recruiting “high performing women in other senior-level positions or look to candidates in academia or the nonprofit and government sectors.” This expansion might necessitate engagement of a search firm or consultant to help enlarge the pool of candidates.
- Adopt term limits or age limits is a strategy that may work in some cases, although views were divided on this approach in light of the trade-offs involved, such as the invaluable knowledge of many long-tenured directors, the arbitrary nature of these limits and the potential loss of high-performing directors.
- Expand board size to include more women, especially for smaller boards. Some stakeholders expressed concern to the GAO about the challenges associated with managing large boards.
- Evaluate board performance to potentially help address low board turnover and to increase board diversity. Board evaluations as a tool for assessing director performance are typically viewed as good corporate practice, but they can also serve as a way to assess board composition and gaps in skill sets. However, some stakeholders interviewed by the GAO said that “board dynamics and culture can make it difficult to use evaluations as a tool to increase turnover by removing under-performing directors from boards.”