As featured in NACD Directorship Magazine

By Keith Dorsey, US Leader, CEO & Board Services Practice

This article was originally published by the National Association of Corporate Directors in their Directorship Summer 2022 magazine. 

In a stunning move for many of us, California Superior Court Judge Maureen Duffy-Lewis ruled in May that California Senate Bill 826 violated the right to equal treatment. The bill required every locally headquartered publicly traded company to have at least one female board director by the end of 2019, and at least one to three female directors by the end of 2021. The decision to overturn Senate Bill 826 came only weeks after another Los Angeles judge ruled similarly against California Assembly Bill 979, which mandated that corporations need to diversify their boards with at least one member from Black, Latino, LGBTQ+, or other underrepresented groups. Determining how to proceed in the wake of these decisions requires some reflection and regrouping.

ORIGINS AND IMPACTS OF DIVERSITY LEGISLATION

The push for diversity on boards began in earnest with pressures ranging from corporate scandals to constant change. While the accounting scandals of Enron and WorldCom were followed by legislation including the Sarbanes-Oxley Act of 2002(1), more recent scandals including the Wells Fargo account fraud, Equifax cybercrime, and questionable business tactics by the likes of Uber and Volkswagen, among others, continued to raise concerns about the quality of corporate governance. Likewise, the increasing pace of change has emphasized the need for refreshment practices to assure that boards have the human capital needed for companies to fulfill their mandates and deliver ongoing value. These pressures have led businesses, institutional investors, stock exchange indexes, government leaders, and other policymakers to argue for increased gender and ethnic diversity among board members—ideally enforced through regulations.(2)

For example, Norway, France, Spain, and Iceland have enacted legislation that require publicly traded companies to fill at least 40 percent of their board seats with women, while an additional 10 countries similarly mandated gender quotas.(3) Statistics show that since the introduction of this legislation, Norwegian companies increased their female representation from just 6 percent of directors in 2002 to 42 percent in 2016.(4) Meanwhile, women occupied 39.9 percent of public company board seats in boards of at least four members as of 2020(5) in Norway, and 45.3 percent of board seats in France and 32.6 percent in Spain as of 2021.(6)

Few US state governments have enacted board diversity quotas, although California introduced gender quota legislation in 2018 via Senate Bill 826(7) and further diversity legislation in 2020 through Assembly Bill 979.(8)

At least 11 states are considering or have enacted board diversity legislation, although none have mandated minimum numbers of female or ethnic minority directors.(9) The California mandates were followed by measurable improvement: By the end of 2019, 99.3 percent of the California firms had at least one female director on the board.(10) While women occupied just 14.6 percent of California board seats in 2018, by 2021, they occupied 32.1 percent of the seats over the course of three years.(11) Nationally, only 26.7 percent of Russell 3000 companies,(12) 30.6 percent of S&P 500 firms,(13) and 29 percent of the Fortune 500 board seats are held by women.(14)

Statistics show that gender diversity legislation has had a measurable effect on the representation of women on boards. Therefore, the rulings against California’s diversity bills have reignited warranted concerns about losing momentum in the cause to improve board effectiveness. Yet the developments this spring should be understood as they are: a minor setback.

WHAT STAKEHOLDERS ARE DOING

Despite worries that diversity’s benefits, including improved governance, decision-making, and financial performance, are at risk in the absence of legislation, we must not forget the power of the many other stakeholders that have rallied behind the cause and created their own forces for change:

These firms have leverage: they account for 75 percent of all indexed mutual funds and exchange traded fund assets, have more than $15 trillion in assets under management, and comprise the dominant shareholder in 88 percent of the firms on the S&P 500.

Nonetheless, for change to continue, the pain of staying the same needs to exceed the pain of changing. Fortunately, there are several things we can do collectively and individually to support change.

WHAT BOARDS AND ASPIRING BOARD MEMBERS CAN DO

Building on the efforts of the various stakeholders striving for board diversity, boards can take several actions to find qualified diverse directors:

  1. Examine your existing board. Analyze your board members’ competencies in three areas: human capital (skills, knowledge, and expertise), social capital (network breadth and depth), and cultural capital (personal background, experiences, and values).
  2. Identify your specific diversity needs. Using the analysis of your board, identify where your board members’ competencies are complementary or redundant. Even more critical, identify which competencies are missing. Gaps in board members’ collective capital (called structural holes) mean both risk and missed opportunities and point to your board’s specific diversity requirements. Filling these gaps can help you gain critical access to new, nonredundant information and resources.
  3. Locate needed candidates. Use the diversity requirements you identified to create a competency profile that guides recruitment of additional members. If you have difficulty finding diverse available directors (a common liability when diversity is lacking), resources such as search firms may help you access the vast pool of qualified diverse candidates.

For their part, aspiring female directors should prioritize building their networks, becoming vocal self- advocates, and maintaining active memberships in regional and national organizations such as NACD, Private Directors Association, Executive Leadership Council, Director Diversity Initiative, Women Corporate Directors, and OnBoarding Women, to name a few.

We have come a long way since our early efforts to improve governance, but we still have more to do. Through our ongoing and concerted efforts, we will achieve the change we need.

 
 

 

ENDNOTES

  1. https://www.congress.gov/bill/107th- congress/house-bill/3763
  2. https://doi.org/10.5465/amj.2013.0319
  3. https://hbr.org/2019/03/when-and-why- diversity-improves-your-boards-performance
  4. https://www.norway.no/en/missions/eu/about- the-mission/news-events- statements/news2/sharing-norways- experience-with-gender-quotas-for-boards/
  5. https://statice.is/publications/news- archive/enterprises/boards-of-directors/ 
  6. https://eige.europa.eu/sites/default/files/docu ments/20220905_pdf_mh0922067enn_002.pdf
  7. https://legiscan.com/CA/bill/SB826/2021
  8. https://legiscan.com/CA/bill/AB979/2021
  9. https://corpgov.law.harvard.edu/2020/05/12/st ates-are-leading-the-charge-to-corporate- boards-diversify/
  10. https://www.politico.com/news/magazine/202 2/02/25/california-companies-women-boards- quotas-00010745
  11. https://www.calpartnersproject.org/wocclaimy ourseat
  12. https://5050wob.com/reports/
  13. https://www.spencerstuart.com/research- and-insight/us-board-index
  14. https://www.heidrick.com/en/insights/boar ds-governance/board-monitor-us-2022
  15. https://www.sec.gov/rules/sro/nasdaq/2020/34-90574.pdf
  16. https://papers.ssrn.com/sol3/papers.cfm? abstract_id=1685615
  17. https://insight.kellogg.northwestern.edu/articl e/women-company-board
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