Next stop for diversity initiatives: corporate boardrooms.

Author:Breuer, Melissa
 
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  1. INTRODUCTION II. BACKGROUND: PROS AND CONS OF INCREASING BOARD DIVERSITY A. Initiatives to Increase Board of Director Diversity in the United States 1. Federal-Level Initiatives to Increase Board Diversity 2. State-Level Initiatives to Increase Board Diversity 3. Non-Profit and Industry Organization Initiatives to Increase Diversity B. Potential Costs of Increasing Board Diversity Initiatives C. Potential Benefits of Increasing Board Diversity Initiatives III. ANALYSIS: ARE THE POLICIES IN PLACE REACHING THE DESIRED RESULT? A. Analyzing Domestic Federal-Level Efforts to Increase Board Diversity B. Analyzing Domestic State-Level Efforts to Increase Board Diversity C. Analyzing Domestic Non-Profit and Industry Organization Efforts to Increase Board Diversity D. Analyzing Efforts to Increase Board Diversity in Countries Outside the United States IV. RECOMMENDATION A. Increase Details of Reporting Requirements Regarding Diversity Considerations B. Implement a "Comply or Explain" Policy V. CONCLUSION I. Introduction

    Over time, minorities have won some battles for equality within society, gaining leverage with voting rights, job opportunities, and education. However, some areas of equality have been left largely unaddressed. The corporate boardroom remains a setting in which diversity is still lacking. (1) While the Securities and Exchange Commission (SEC) has released some directives concerning board diversity, (2) and some state-level initiatives have recently been passed, (3) boardrooms in the United States have not diversified at the rate that they could. However, boards benefit from increased diversity. As diversity increases, the breadth of perspectives on a board increases (4)--contributing to better decision-making--which arguably increases corporate performance in other ways. (5)

    This Note addresses the lack of board diversity initiatives currently in place in the United States and discusses the benefits that might be obtained from adopting a heightened diversity policy modeled after those found in other countries. While this Note primarily discusses gender diversity, this is merely due to more extensive literature on gender diversity. The benefits and recommendations concerning diversity initiatives can be applied to race, ethnicity, and age as well. Part II discusses existing initiatives to increase board diversity in the United States and some of the costs and benefits associated with board diversity policies generally. Part III analyzes how effective the United States' board diversity policies have been in increasing divesity and compares these methods to board diversity methods currently employed in other countries. Finally, Part IV recommends a heightened board diversity policy in the United States to help increase board diversity and, subsequently, corporate performance at a faster rate. While a number of other articles discuss diversity on corporate boards, (6) none have yet analyzed board diversity at a state, national, and international level, including recent legislation, and concluded with the recommendation described in this Note.

  2. BACKGROUND: PROS AND CONS OF INCREASING BOARD DIVERSITY

    This Part will review the recent movement toward increasing board diversity. In particular, this Part will begin by discussing initiatives taken by federal, state, and governmental actors. This Part will then discuss the costs and benefits that have been associated with efforts to increase diversity.

    1. Initiatives to Increase Board of Director Diversity in the United States

      Corporations continue to struggle to maintain diversity on their boards. In 2011, 74% of corporate directors were white males. (7) Furthermore, historically, a large majority of these directors came from upper or upper-middle class backgrounds. (8) Fortune 250 companies did not even begin to elect female directors to increase diversity until the mid-1980s. (9)

      While diversity on boards is still largely lacking, a recent movement has developed to further increase the amount of diversity on boards. (10) Stakeholders, organizations, and shareholder groups are becoming increasingly interested in board diversity. (11) Despite the growing focus, diversity has not rapidly increased. (12) The number of women serving on public company boards only increased from 16% to 18% from 2008-2012. (13) About 10% of U.S. companies have no women on their boards. (14) While some corporations have used term limits to increase the amount of younger members on boards, this growth has been slow. (15)

      1. Federal-Level Initiatives to Increase Board Diversity

        Instead of instituting federal regulations that mandate diversity, the United States has historically simply encouraged diversity on boards. (16) In 2009, the SEC adopted a rule regarding the reporting of how diversity was taken into account in board nominations. (17) The SEC Amendments to Item 407(c) of Regulation S-K require companies to disclose whether diversity is considered in identifying nominees and, if so, how diversity is considered. (18) Along with this, if a company has a policy for considering diversity, a description of how the policy is implemented must be included, as well as how the company evaluates the effectiveness of the policy. (19) When the rule was being proposed, many commentators suggested that these disclosures were important to investors because it would provide them with "information on corporate culture and governance practices that would enable investors to make more informed voting and investment decisions." (20) However, this rule does not define "diversity," so companies have been able to provide disclosures that fail to involve racial or gender diversity. (21)

      2. State-Level Initiatives to Increase Board Diversity

        Despite the nonexistence of expansive federal laws, movement among some state actors suggests board of director diversity may someday be mandated by state law. On July 11, 2013, the California State Senate introduced Resolution Number 62 regarding women on corporate boards. (22) The resolution was set forth to encourage "equitable and diverse gender representation on corporate boards, and urge that, within a 3-year period from January 2014 to December 2016, inclusive, every publicly held corporation in California" have a minimum amount of women on its board, with the minimum amount established by the statute depending on the size of the board. (23) The resolution discussed a number of studies finding that women directors are largely lacking and that improved diversity on boards is associated with an improvement in financial value and firm value. (24) California Resolution SCR-62 was passed on September 12, 2013, making California the first state in the United States to take a position on board diversity and the first state to define board diversity. (25) SCR-62 was sponsored by the National Association of Women Business Owners-California (NAWBO-CA). (26)

        Although SCR-62 is a resolution having no binding legal costs for violations, the passage of the bill sets a valuable precedent that other states are beginning to follow. (27) On May 31, 2015, the Illinois House of Representatives passed HR 439, (28) and on July 29, 2015, the Massachusetts Senate passed S1007.29 Each of these resolutions seeks to accomplish the same set of goals that CA SCR-62 was established to achieve. (30) Again, although these resolutions are legally non-binding, they suggest that board of director diversity may someday be further mandated by law.

      3. Non-Profit and Industry Organization Initiatives to Increase Diversity

        Industry and non-profit organizations have adopted further initiatives that may help forward board diversity goals. For example, the Thirty Percent Coalition is a group of leading women's organizations, institutional investors, executives, and elected and concerned individuals that seeks to achieve 30% women representation on public company boards by 2015. (31) The Thirty Percent Coalition has found success through letter-writing campaigns and shareholder resolutions aimed at companies without women serving on their boards. (32) Another organization that seeks to increase representation of women on boards is 2020 Women on Boards. (33) 2020 Women on Boards annually publishes a Gender Diversity Index of Fortune 1000 Companies to draw attention to companies' attempts to diversify. (34)

    2. Potential Costs of Increasing Board Diversity Initiatives

      Despite the aforementioned recent attempts to increase board diversity, many states have, so far, failed to adopt laws or resolutions addressing diversity on boards. There are some potential policy reasons for this. one reason is that some companies are concerned that diversity requirements may serve to replace qualified directors with less experienced, but more diverse, directors in order to meet the diversity quota. (35) Some research has shown that women receiving director promotions were less experienced than the directors whose positions they filled. (36)

      Another worry among some companies is that if diversity is forced upon companies, the change will be rejected by current majority directors who would make attempts to undermine the minority directors. (37) Those that hold this belief think that, in order for women and other minorities to be welcomed and appreciated by companies and their boards, the selection process cannot be forced. (38) Some research has shown that, when a few minority members are included into a group, these members often experience feelings of "social isolation, heightened visibility, ... pressure to adopt stereotyped roles[,] ... [and] are likely to do less well in the group." (39) On the reverse side, non-minority members might also feel that they are being excluded and that the minority group members are receiving preferential treatment over them.

      Related to this notion is a fear that, although increasing diversity may add more perspectives to the board, it may also create tensions among board...

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