May 12, 2021

Board Diversity: A Nuanced Issue

A lot of discussions are happening right now about board diversity – including what that means, how to achieve it, and who it benefits. This 25-page Glass Lewis report (available for download) acknowledges that these are nuanced issues. Here’s an excerpt:

Whether increasing gender diversity in boardrooms poses a benefit or a detriment to companies is a complex question. Increasing the number and influence of women on boards must involve recruiting uniquely qualified directors who bring a breadth of experience and insight to the board table. Companies operate in myriad industries and locations and have unique strategies, challenges, and opportunities. Simply adding women to the board for diversity’s sake and without careful consideration of qualifications and experience is unlikely to automatically effect any positive corporate change. However, we view a companies’ placement of women on boards as being representative of companies’ consideration of broader, and harder to measure, diversity.

Glass Lewis believes that diversity, in general, is a positive force for driving corporate performance, as qualified and committed directors with different backgrounds, experiences, and knowledge will likely enhance corporate performance. We believe that gender is just one, albeit important, aspect of diversity and boards should ensure that their directors, regardless of gender, possess the skills, knowledge, and experience that will drive corporate performance and enhance and protect shareholder value.

More on “Board Diversity: Does Diversity Enhance Shareholder Value?”

John blogged last month about a paper from Harvard Law Prof. Jesse Fried that questioned the empirical support for Nasdaq’s board diversity listing proposal. University of MN Law Prof. and former chief White House ethics lawyer Richard Painter has written up a thorough rebuttal. Here’s an excerpt from his CLS summary:

Fried cites only one study showing a slightly negative impact on stock price from gender diversity on corporate boards. This study uses a data set two decades old that did not include the financial crisis of 2008. The same study found that women board members are more effective in monitoring management. The authors of the study attributed the slightly negative impact of board gender diversity on stock price to a number of factors, including most notably the fact that excessive monitoring of management by board members may decrease shareholder value.

Had the data set included stock price performance in 2008 and 2009, the aftermath of the financial crisis, it might have shown different results given that insufficient monitoring for exposure to financial risk was at least partially responsible for destroying so much shareholder value during that period It is also ironic that many academics have been pushing for more monitoring of management by corporate directors, including Harvard’s shareholder rights project which aggressively campaigned for annual election of directors, only to see at least some of them get cold feet about the board monitoring function when directors happen to be women.

The original piece also said there was a negative market reaction to California’s board diversity statute and attributed that to investor hesitation about the benefits of diversity. Professor Painter pointed out that the reaction actually may have been in response to the very controversial & significant fact that the law was a departure from the internal affairs doctrine. That aspect of the law could have concerned investors who don’t want to move toward a model in which states can regulate the corporate aspects of companies headquartered within their borders, even if incorporated elsewhere.

Professor Painter also emphasizes that the Nasdaq rule is a “comply or explain” rule, and aimed at companies that are lagging behind market averages. He says:

Nasdaq chose the more flexible “comply or explain” option carefully, knowing that while studies on the impact of boardroom diversity on firm performance are not uniform in their conclusions, boardroom diversity is important to some investors, particularly institutional investors, and that disclosure of this information to investors is important. Nasdaq, unlike the California legislature, is also very much focused on shareholder value. Finally, the Nasdaq rule could discourage California and other states from moving further in the direction of intruding upon the internal affairs of corporations headquartered within their borders but incorporated elsewhere.

Board Gender Diversity: What About Women of Color?

All of this back & forth aside, due to investor demands and legislation, the makeup of boards is gradually evolving. A new report from the California Partners Project updates earlier stats on board composition. While the report doesn’t delve in to all different aspects of diversity, it suggests that most of the gains right now are coming in the form of directors who are part of a single underrepresented group – e.g., white women – versus those whose identities intersect with multiple underrepresented communities – e.g., women of color. Here are some takeaways:

In the two years before California’s board gender diversity statute – 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.

Although women now hold 26.5% of California’s public company board seats, only 6.6% of board seats are held by women of color, even though females of color comprise 32% of our state’s population. When it comes to Latinas, the disparity is truly shocking. Latinas make up more than 19% of California’s population and Latinos comprise over 37% of California’s workforce, yet Latinas hold only 1% of the seats on California’s public company boards.

Pages 20-24 of the report suggest strategies to further diversify boards – expand where you’re looking for candidates, expand your definition of “qualified,” take seriously the risks of homogeneous thinking, and prioritize different backgrounds over getting a “cultural fit.” See this Cooley blog for more info about the report and related topics.

Liz Dunshee