Seeking Unity, Not Uniformity*: Diversity and the Corporate Board of Directors
New board of directors appointments such as Indra Nooyi joining Amazon, Nikki Haley nominated by Boeing, and Michelle J. Howard as IBM’s latest director illustrate the accelerating trend of gender and minority diversity on corporate boards – an apt topic for Women’s History Month. And there are plentiful reasons for promoting board diversity.
Sometimes board diversity is required by law. Outside the U.S., primarily in Europe, gender diversity on boards is often required. Since 2003, when Norway adopted a 40% women directors standard, a number of other countries (including Germany, Spain, and France) now require various minimum women directors. In the U.S., California has become the first state to set gender diversity rules by law for all public corporations headquartered in the state. California’s SB 826 requires one woman director for such company boards by year-end 2019. By 2021, the number of women directors required rises to two (for boards of five) and three (for boards of six or more). Recent research published by the Board Governance Research LLC indicates that covered California companies must fill 1,060 existing or new board seats with women by year-end 2021. Several other states have taken the softer approach of adopting resolutions supporting voluntary actions. In fact, California began with this approach years ago and ended up with modest diversity improvements. Whether a state should or can properly legislate requirements for board diversity is controversial and legal challenges will likely follow the California law. Meanwhile, corporations continue to add diverse candidates to their boards, often for practical business reasons.
Over the past two years, women and minorities totaled a solid 50% of new S&P 500 directors, as reported in Spencer Stuart’s 2018 Board Index. Women candidates appear to be making particularly big strides and now represent 24% of all directors. Smaller public companies have more work to do. Why is this progress so important for a business? Institutional investors and proxy advisors (such as Blackrock, State Street, Vanguard, ISS, and Glass Lewis) have adopted voting policies requiring diversity progress, some with specific goals and consequences of negative voting recommendations. Further, firms like Russell Reynolds point to business research and studies showing that leadership diversity, beginning with board diversity, simply improves business performance. See 2019 Corporate Governance Trends and Harvard Business Review.
The trend toward board diversity will continue. We’ll be on the watch for legislative developments, court challenges, and corporate announcements.
*“Treasure diversity. Seek unity, not uniformity. Strive for oneness, not sameness.” Dan Zadra