Board diversity: are we on the eve of real change?

Author:Sandford, Nicole

There may be reason for optimism if you are a woman or ethnic minority who is looking to join a board. This is despite the slow progress indicated by recent studies such as the Financial Women Association's FWA100, a compilation of the 100 largest public companies in the New York metropolitan area. This study has shown only a slight increase since 2006--from 16.6% to 18.4%. But more than 30% of FWA100 companies have no women directors at all.

However, trends in three important areas support an optimistic view toward the future: structural changes in corporate boards; recent investor statements and actions; and the evolution of company policies.

Structural Changes: How did board composition become so uniform? Historically, CEOs had the most power to select the board. CEOs often sought other like-minded people who would support a collegial atmosphere--often selecting other senior executives that they knew. CEOs also sought board members whose pedigree could benefit the company from a public relations or business perspective. For women and ethnic minorities, this oftentimes kept the door closed quite securely. Unless you happened to be a woman/minority CEO with strong name recognition, you were pretty much out of luck. Individuals who met this high standard sometimes ended up on far too many boards, inviting criticism from a wide range of sources.

Even before the Dodd-Frank Wall Street Reform and Consumer Protection Act and the potential for proxy access, structural changes occurred that altered this process and diminished the ability of public company CEOs to unilaterally decide who is to join the board. For example, NYSE and Nasdaq listing standards require independent board members to lead the director nomination processes, and SEC disclosures related to board composition have been instituted. In addition, a 2010 Conference Board survey (co-sponsored by Deloitte and the Society of Corporate Secretaries and Governance Professionals) noted:

* More than 70% of large companies ($5 billion or more in revenues) have majority voting provisions.

* Independent board leadership--in the form of a separate chair (more than 40% of the responding companies) or a lead director (virtually all of the rest)--has become commonplace.

* Annual vs. staggered director elections are the standard (80% or more) for the largest U.S. companies.

These measures created mechanisms for investors to influence board composition. As a result, boards appear to be more...

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