With the passage of SB 826 in 2018, California became the first state to mandate board gender diversity (see this PubCo post). In 2020, the California Partners Project, which was founded by California’s current First Lady, released a progress report on women’s representation on boards of California public companies, tracking the changes in gender diversity on California boards since enactment of the law. That same year, AB 979 was signed into law in California. That bill was designed to do for “underrepresented communities” on boards of directors what SB 826 did for board gender diversity. (See this PubCo post.) The CPP has just released a new report that not only updates its 2020 progress report on board gender diversity, but also provides data on women of color on California’s public company boards. The takeaway is that, while there has been tremendous progress in increasing the number of women on boards, nevertheless, much work remains “to tap all of our talent and achieve racial and cultural equity. Most women on California’s corporate boards are white, while women of color—especially Latinas—remain severely underrepresented.” In addition to new data, the report offers some strategies for overcoming these deficits in diversity.
The CPP report looked at diversity of the boards of 717 publicly traded companies, listed on the NYSE, Nasdaq or NYSE American exchanges, with “principal executive offices” located in California, as reported on their most recent Forms 10-K or 424(b)(4). Data was collected by consultant Equilar from regulatory filings, such as proxy statements and Forms 8-K as of March 2021. Race and ethnicity were identified using data from Equilar and from The Latino Corporate Directors Association, along with publicly available information, and based on the director’s self-identification, name, biography, affiliations and other resources. Notably, the report highlights the challenge of reporting data regarding women of color, given that companies are not required to report information about directors’ race or ethnicity.
According to the new report, as of March 1, 2021, there were 717 public companies headquartered in California (678, excluding SPACs), reflecting a 10% increase in the number since June 30, 2020. The CPP determined that there were 5,599 board seats at those companies, with 1,483, or 26.5%, held by women, compared to 766, of 15.5%, held by women in 2018. The CPP analysis showed that 38% of subject companies “already meet the end of 2021 gender requirement, and 41% need to add one more woman director to do so.” Twenty-one percent need to add two or more women to satisfy the 2021 requirement. Interestingly, the CPP reports that smaller public companies, which historically have had the least diverse boards, are catching up, with 93% of California’s 142 publicly traded microcap companies having at least one woman on their boards, almost doubling the 47% found in 2018. California’s 39 SPACs are apparently laggards with 12.8% all-male boards, compared to 1.3% for other California public companies (a decrease from 29% in 2018). On the other hand, only 1.5% of California public companies have boards composed of a majority of women directors, while 96.9% are majority men and 1.6% have gender parity.
The report states that, if the number of board seats at each company remains the same, SB 826 would require that 2,046 board seats be filled by women directors by the end of 2021, leaving at least 563 more board seats to fill with women directors by the end of 2021. According to the report, in “the two years before SB 826 was enacted, just 208 corporate board seats were newly filled by women. In the two years since, that number grew to 739. And in the first quarter of 2021, women filled 45% of public company board appointments in California, an indicator that women’s representation on boards is on the rise.”
However, women of color, the report shows, are not making the same type of progress. While 18.75% of California company board seats are held by a director of color, 12.1% are held by men; only 6.6% of board seats are held by women of color. But women of color represent 32% of the total state population. Latinas fare the worst: according to the report, Latinas make up more than 19% of California’s population, but hold only 1% of the board seats.
The vast majority of directors (81.2%) continue to be White, and, in Q1 2021, 25.7% of California companies had all White boards, although that percentile reflects a 5.5% decrease from the previous quarter. White women hold 20.2% of all board seats, while representing 18.5% of the total state population. AAPI women make up 7.8% of the total state population but hold only 3.3% of the directors, Black women constitute 3.5% of the population but hold only 2% of the board seats and 2% of the population are women of other ethnicities, such as Native American or Middle Eastern, who hold only 0.3% of the board seats. From July 1, 2020 through March 31, 2021, new appointments of women directors were 63% White, 17% AAPI, 14% Black, 4.5% Latinas and 1.5% other ethnicities.
Why does board gender diversity matter? Aside from the obvious issues of fairness and equity, research shows that companies with diverse boards do better. The report states that “[c]ompanies with three or more female directors reported earnings that were 45% higher per share than companies with no female directors.”
What are some strategies to overcome these diversity deficits? To get some thoughts on these issues, the CPP convened focus groups composed of 46 business leaders, investors and experts in board diversity and governance. The following were some of the strategies the CPP gleaned from these focus groups (italics added):
- Reach beyond insular networks. One hurdle to overcome is that director search committees “are most comfortable with candidates who are ‘known and vouched for,’” with the result that boards end up recruiting from their existing, but insular, networks. It should come as no surprise that “women, and especially women of color, tend to be underrepresented within the personal networks that CEOs and directors rely on to identify board candidates.” To expand the candidate pool, search committees will need to “keep a constant recruiting mindset” by remaining on the lookout for prospective diverse directors outside of their networks, and introducing them to other directors—even if there is no active director search going on at the time. They will also need to make a conscious effort to reach out to networks that include diverse populations, such as in CPP’s Resource Hub.
- Reject artificial limitations on “qualified.” How often do you hear the common refrain that “we’d love to add women to our board, but there just aren’t any qualified candidates”? One possibilty is that boards need to revisit their definitions of “qualified”? Limiting the search for “qualified” candidates to CEOs, CFOs and public company directors is unnecessarily limited, creating “the misperception that there aren’t enough qualified women candidates.” Instead, boards need to expand their definitions by taking an inventory of their needs and looking at “skill sets rather than the job title.” Granted, that may be a more difficult chore than simply assuming skills based on job title. But “there are many different paths to leadership,” the CPP reminds us, and the company’s goal should be “to find additive leaders for your board, not to replicate who is already there.”
- Don’t overestimate the risk associated with diverse candidates. To be sure, sometimes “unconscious biases about gender and race create heightened scrutiny of women candidates, particularly women candidates of color.” But diversity of experience and perspective can provide an opportunity that outweighs misperceived risks. Based on learning from its focus groups, the CPP contends that boards “think more deeply, work harder, and make better decisions when they have a full, diverse roster of talent to question assumptions, combat groupthink, and bring every possible resource and perspective to the table. The risk of missing out on that optimized decision-making is a far greater risk than the ‘risk’ of adding someone to your board who has less overlap with existing directors, especially when facing the complex problem solving that the next few decades will require.” The CPP advises that, “when selecting a director, establish the skills and competencies you need in a new director and stick to it. If diversity of experiences and opinions is important, make sure they are incorporated into the criteria. Notice and hold each other accountable to that criteria and make sure you do not add extra requirements for women candidates.”
- Seek Difference Over Conformity. In many ways, it seems quite natural for directors to select candidates like themselves with similar backgrounds “because they see them as a better cultural fit and more likely to go with the flow.” But “cultural fit” is often a “euphemism for conformity” and can limit board effectiveness. The CPP recommends that, instead of cultural fit, boards look for new directors who will enhance decision-making by bringing diverse experience and perspectives into the process. Moreover, the CPP suggests, “the desire for a cultural fit can itself ward off qualified candidates. Women of color in particular are reluctant to join boards where they don’t feel that their experience and credentials are valued in the same way as their peers—and decline offers to serve as a result.”