How To Make Corporate Boards More Diverse – Center for American Progress


Introduction and summary

The year 2020 brought many dark clouds, but one silver lining was the broad recognition that America must address its challenges on racial and gender equity. In particular, the need for a renewed commitment to economic inclusiveness is now widely acknowledged as critical to the country’s future. While the road to achieving a more inclusive economy will not be easy, the U.S. economy will benefit tremendously in the years ahead from a more racially and gender-diverse workforce, including from the skills, experiences, and creativity of diverse leadership.

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Corporate America lacks racial, ethnic, and gender diversity in its top positions. The stock market soared during the coronavirus pandemic, growing the wealth of a group of mostly white and privileged shareholders but leaving many women, people of color, and low-wage workers to suffer through unemployment, food scarcity, and personal loss.

According to the 2019 U.S. census, an estimated 50.8 percent of the U.S. population are women. An Institutional Shareholder Services (ISS) study of the 2019 boards of directors of 2,175 Russell 3000 companies found that 45 percent of new board seats awarded that year were given to women, yet women still occupied only 19 percent of all board seats. The need for progress on racial diversity is even greater. Census data show that 39.9 percent of Americans are nonwhite. Yet the ISS study found that only 10 percent of Russell 3000 directors belonged to an ethnic minority, and a meager 15 percent of new directors are ethnically diverse. For people living at the intersections of multiple identities, representation at the top can be even more paltry: In 2018, women of color represented just 4.6 percent of board seats among Fortune 500 companies. Unfortunately, data on the LGBTQ population are not standardized in data on corporate boards or the U.S. census. Much work remains to achieve racial and gender equity on boards of directors across corporate America, from Fortune 500 companies to small-cap growth companies.

At the same time, investor demand for more racial, ethnic, and gender diversity on corporate boards is growing dramatically, and academic research is increasingly illustrating the value of diversity to corporate performance. Recent public comments in support of a Nasdaq board diversity proposal demonstrate the breadth of market participants—including investors—who care about this information.

Some in the business world are taking laudable steps, and their efforts provide useful lessons for improving diversity. However, despite a large swath of corporations expressing that they intend to diversify their boards, progress has been limited. Bolder action is needed. Corporate America faces many challenges in building more diversity, equity and inclusion at the top. Significant progress will require both private sector initiatives and the unique tools available to federal regulators.

Companies should focus on building a diverse pool from which to draw candidates; to do so, they need to reach out to new organizations that can help find suitable candidates through new pipelines. Companies should also eliminate selection criteria and processes that have blocked board diversification in the past, identify new approaches, standardize new best practices, and regularly assess the effectiveness of those practices going forward. For example, companies could create a matrix of current board members’ characteristics so that they can identify gaps that need to be filled and develop strategies for improving racial and gender equity on the board. Finally, the U.S. Securities and Exchange Commission (SEC) must recognize that the current principles-based approach to board diversity disclosure does not meet the demands of the marketplace. The SEC should require companies to disclose on their Form 10-K—the annual report of the firm’s business and financial condition—specific diversity information similar to what the Center for American Progress recently called for in a report on workforce disclosure. Companies should also report information about the specific actions they take to achieve racial, ethnic, and gender diversity in their board selection process, including specific measures of success they use or how they assess the effectiveness of their processes.

Investors, other market participants, and the public have made it clear that progress on diversity is at least as important at the board level as it is across the rest of the workforce. This report considers the current state of corporate board diversity and provides recommendations to accelerate progress.

Diversity in the boardroom is good for business and workers

Diverse viewpoints can positively influence a company’s success. In her 2015 speech about building healthy companies and a stronger economy, SEC Commissioner Kara Stein pointed out that “[d]iverse boards appear to help avoid ‘groupthink,’ a priority when corporate success depends heavily on risk management.” Stein’s speech focused on women on corporate boards, and she cited multiple studies demonstrating their positive impacts as directors. Specifically, researchers publishing in the Journal of Financial Economics determined that “diverse boards are more likely to hold CEOs accountable for poor stock price performance,” and that women are tougher monitors with better attendance on key committee assignments.

Beyond qualities that determine good executives, gender-diverse boards may help provide strong financial performance for their respective firms. In her speech, Stein cited Dr. Yilmaz Arguden, a Harvard Business Review columnist and governance expert, who determined that “[w]hen Fortune 500 companies were ranked by the number of women directors on their boards, those in the highest quartile in 2009 reported 42% greater return on sales and a 53% higher return on equity than the rest.” Finally, Stein referenced environmental, social, and governance (ESG) research conducted by MSCI Inc.—a leading investment research firm—which found that firms with a higher percentage of women on their boards had fewer instances of fraud, accounting controversies, bribery, and corruption. While causation is difficult to prove in this area, there is a strong correlation between gender diversity and corporate performance.

In a report entitled “Duty and Diversity,” Chris Brummer, a professor at Georgetown University Law Center, and Leo E. Strine, Jr., former chief justice of the Delaware Supreme Court, expanded the research on board diversity to include racial and ethnic diversity. They determined that the case for diversity on corporate boards makes strong business sense based on empirical data and the literature of organizational psychology. Brummer and Strine specifically mention a study by The Carlyle Group, which observed that portfolio companies with two or more directors who identified as Black, Hispanic, Asian, or women experienced average earnings growth of 12.3 percent over the previous three years, while portfolio companies with no diverse directors experienced an average of only 0.5 percent earnings growth. Other financial services firms such as McKinsey, Citi, and Deloitte reported similar results when analyzing the profitability, competitive strength, and work culture of their clients who had ethnically diverse boards. Brummer and Strine found that research in the field of corporate organizational theory suggests that diversity has a positive impact on risk mitigation and strategic long-term thinking. These benefits stem from the diverse lived experiences that women and people of color, in particular, bring to the table.

Although less empirical research exists for the LGBTQ community, at least one study has shown that U.S. laws prohibiting discrimination in the workplace based on sexual orientation and gender identity spur workforce innovation and lead to higher company performance. Increased focus on diversity and inclusion in recent years is leading to more research in this important area. Ultimately, other disadvantaged groups, such as people with disabilities and veterans, should be included in board diversity-building efforts.

The correlation between diversity and a firm’s success has…


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