November 30, 2022

Board Diversity: What’s Moved the Needle?

A recent working paper from the National Bureau of Economic Research poses this question:

There is a growing emphasis on diversity, equity, and inclusion (DEI) in American society. A majority of S&P 500 companies now employ a chief diversity officer (Green, 2021), and since 2017, nearly 2,000 CEOs have pledged to advance DEI within their firms (PwC, 2021). Yet, women continue to be underrepresented in the highest tiers of US leadership, including in business, where women account for only 5% of public company CEOs and 18% of top executives despite accounting for 48% of the labor force and 40% of managers (ILO, 2020).

To increase gender diversity in corporate leadership, governments around the world have enacted quotas requiring companies to appoint women to their board of directors. In the US, where as recently as 2016 only 13% of public companies’ directors were women, California adopted a board gender quota — which courts have since overturned — and similar regulations have been proposed in other states. That lawmakers are turning to controversial mandates begs the question: Why don’t firms appoint more female leaders on their own, and how might they be encouraged to do so without government intervention?

The researchers found that “private ordering” by shareholders has had the greatest impact on increasing board gender diversity – in particular, due to voting policies of the “Big 3” asset managers following State Street’s “Fearless Girl” campaign that was launched in March 2017. Here’s what they concluded, based on board composition data at companies where the Big 3 had an ownership stake:

We estimate that their campaigns led American corporations to add at least 2.5 times as many female directors in 2019 as they had in 2016. Firms increased diversity by identifying candidates beyond managers’ existing networks and by placing less emphasis on candidates’ executive experience. Firms also promoted more female directors to key board positions, indicating firms’ responses went beyond tokenism. Our results highlight index investors’ ability to effectuate broad-based governance changes and the important impact of investor buy-in in increasing corporate-leadership diversity.

The influence of the Big 3 has become much more politically charged since 2017, causing the institutions to look for ways to disseminate voting power and become slightly less vocal, but stating diversity expectations was definitely groundbreaking at the time. The voting policies of BlackRock & SSGA continue to articulate diversity aspirations, and leave the door open to “case-by-case” voting decisions for companies that don’t meet them. Vanguard’s voting policy is more disclosure-based.

Liz Dunshee