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Corporate Governance: Board Diversity
May 21, 2019
Introduction
A public company's board of directors is a group of
individuals who have been elected to be the company's
fiduciaries on behalf of its shareholders. Along with
company executives-such as the chief executive officer
(CEO)-who run the company on a daily basis, the board
helps set the tone for the corporation. Board mandates
include assisting in setting broad corporate objectives,
hiring and firing the CEO, who primarily runs the company,
and providing support for senior management. Key board
committees include the compensation committee
(responsible for setting pay packages for key executives),
the nominating and governance committee (responsible for
ensuring that there are quality candidates running for the
board), and the audit committee (responsible for overseeing
financial reporting).
Congressional and policy interests in corporate boards have
increased in recent years, with one primary issue being the
composition of the directors of the board. In particular,
there has been a sustained movement for increased gender
diversity on corporate boards. Supporters argue, among
other things, that opening the pool of prospective directors
to an underutilized group of often highly qualified female
leaders would bring fresh, unique, and innovative
perspectives to boards and their companies, and that
research by Credit Suisse and others has found that firms
with diverse boards tend to perform better financially.
Opponents argue, among other things, that academic studies
have not replicated these findings and that boards owe their
primary duty to maximize shareholder value rather than to
promote various social goods.
During the last decade or so, large companies have felt
increased pressure from pension funds (such as CalPERS
and CalSTRS) and large asset managers (such as State
Street and Blackrock) to adopt more gender diverse boards.
Some countries, such as Norway and Germany, have
enacted laws requiring gender diverse boards, and the state
of California recently enacted a similar requirement. This In
Focus examines key policy developments relating to gender
diversity on corporate boards, including regulatory
requirements, and efforts to increase gender diversity on
boards in states and other countries. It also describes
various opposing views on the topic. Although the issue has
primarily focused on gender diversity to date, movements
exist to increase board representation of other groups as
well.
Gender Diversity on Corporate Boards
There are some 3,500 public companies in the United
States. Each one has a board of directors with between 3
and 31 members (on average about 9). Directors are usually
split between inside directors (board members who are
employees, officers, or direct stakeholders in the company)
and outside or independent directors (board members with
no affiliation with the company), who are generally the
majority of directors on a board.
Historically, public company boards were the exclusive
preserve of white males. For example, a 2013 study by
Larcker & Tayan reportedly found that the average
company in the Fortune 250 stock index did not have a
single female director until the mid-1980s. In 2008, women
reportedly held 13% of the board seats in the S&P 1500
Stock Index (which tracks nearly half of public firms). In
2017, that percentage increased to 19%. Nevertheless, a
2016 report from the Government Accountability Office
(GAO) observed that assuming that women join boards in
equal proportion-a proportion more than twice what it
currently is-we estimated it could take about 10 years
from 2014 for women to comprise 30 percent of board
directors and more than 40 years for the representation of
women on boards to match that of men.
SEC Disclosure Requirements
In 2009, as part of its statutory mission of investor
protection through corporate disclosure, the Securities and
Exchange Commission (SEC) promulgated rules requiring
corporate disclosure on whether, and if so how, the
nominating committee (or the board) considers diversity in
identifying nominees for director [and] [i]f the nominating
committee (or the board) has a policy with regard to the
consideration of diversity in identifying director nominees.
In subsequent years, the SEC disclosure requirements have
been widely criticized for their limited utility by SEC
officials, members of the investor community, and a 2016
GAO report, among others. A major concern is that many
firms do not include factors such as gender, race, or
ethnicity in how they define diversity.
In early 2019, the SEC staff issued new corporate guidance
on board diversity disclosures. The guidance said that when
making a decision about nominating a particular person to
be a director, to the extent that a board considers that
person's self-identified diversity characteristics such as
race, religion, and gender, the [SEC's] expectation was that
the company's discussion required by [the disclosure
regulation] would include, but not necessarily be limited to,
identifying those characteristics and how they were
considered.
California and Other States
On September 30, 2018, then-California Governor Jerry
Brown signed SB 826 into law, making the state the first to
enact board diversity quotas. Under the law, all stock
exchange-traded California-based companies are required
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