It Seems that Everyone is on Board to Diversify Corporate Boards of Directors

California took a large leap forward in its plans to diversify boards of directors, further than any bill in the country has gone before. Governor Gavin Newsom signed into law Assembly Bill 979 in Fall 2020. By the end of 2021, corporate boards of public companies must include a "person of color or person who identifies as gay, lesbian, bisexual or transgender" (up to 3 depending on the company size).

Nasdaq wasn't not far behind. On Aug. 6, 2021, the company announced that its 3,000 current listing companies have to do the same, or explain to shareholders why not. It is required that one member of diversity should be on the board by 2023 and two members by 2025 (Nasdaq’s Board Diversity Rule..., October 1, 2021). Companies that go public after July 1, 2021, must already adhere to these rules. Nasdaq rules specify that "annually disclose aggregated statistical information about the board’s voluntary self-identified gender and racial characteristics and LGBTQ+ status" (SEC Approves New..., Aug. 12, 2021).

California has been a leader in diversifying corporate boards in the past, as well. Senate Bill 826 (2018) required company boards to have at least one woman by 2019 and for larger companies, up to three. There is no denying the success of Senate Bill 826. "There were at least 115 California public companies that did not have a single woman on their board in 2017. Now there are only five — or just 1% of the state’s firms on the Russell 3000 index. Yet most companies still have work to do" (Halper, 2021).

When it was just a recommendation in 2015 that boards diversity, California companies did nothing to act on board changes. Not only did companies begin to diversify after the 826 and 979 Bills, effects were felt elsewhere in the country. Several states now require gender diversity on boards, and others now require disclosure of board membership in order to make public the diversity or lack thereof.

No companies in California have joined a lawsuit by a conservative legal group, Pacific Legal Foundation, in fighting these laws (Nasdaq’s Board Diversity Rule..., October 1, 2021). This could be due to a few reasons. Companies may want to avoid negative publicity if they fight diversifying. Six years after companies would not comply with the state 'suggested' board changes, the world is viewing it as a necessity - social media and electronic media can quickly take down a company's reputation. Corporate social responsibility (CSR) is expected by shareholders. Its absence can not only bring negative media attention, but miss the mark for investors who are expecting a positive CSR mission.

Another reason is that companies may now be realizing positive effects of diverse boards, or may see their competitors doing so. It is well-known that diverse teams make more effective decisions, albeit not as quickly perhaps. But the connection to the consumer and effective marketing requires varied perspectives and backgrounds. It does seem a bit absurd, for example, to see a company marketing to women of color with an all white male board of directors.

Experts say that potential Board Members can easily determine whether they are being asked to serve due to their diversity status versus expertise (SHRM Corporate Board Diversity..., Jan 16, 2021). Both Ana Dutra, co-chair of the Latino Corporate Directors Education Foundation and Unilever Board Member Esi Eggleston Bracey said that their Board membership has been contingent on their direct expertise of value to that company. Both report being wary of first times they were approached. According to SHRM, Dutra stated, " I want to be a super-effective director who happens to be a woman and happens to be a Latina."

How much difference does diversity make on Boards? Public image is important - boards should reflect their customers and demonstrate the value of diversity. Data show benefits of diversity in real monetary terms, though, too. Companies with boards that are at least 30% women perform better than those with less gender diverse boards (7). Industry sectors retail and computer software benefited most. Multi-generational boards also performed better than less diverse boards.

Don't forget the power of leadership also. The corporate chairperson and some research suggests a trickle-down effect on managers and employees regarding justice and value of diversity (Fine, Sojo Monzon, & Lawford-Smith, 2020; Kanaldi, Zhang, & Kakabadse, 2020).

Note:

SHRM (Jan. 16, 2021) reports that 45% of Russell 3000 and 46% of new S&P board members are women versus in 2019, with 19% and 25%, respectively. The same SHRM article gives the lack of diversity versus the U.S. population:

  • "White individuals account for about 60 percent of the population but hold 84 percent of Fortune 500 board seats.

  • Latinos, the country's fastest-growing ethnicity, make up 18.5 of the population but fill just 2.2 percent of board seats on Russell 3000 companies' boards.

  • Black individuals represent 12.5 percent of the population but hold just 4.1 percent of Russell 3000 board seats. In addition, 37 percent of S&P 500 companies had no Black board members in 2019."

Sources (in order of use)

  1. Halper, E. (2021, Oct. 1). California outlawed the all-white-male boardroom. That move is reshaping corporate America. Los Angeles Times (CA). https://www.latimes.com/politics/story/2021-09-29/california-outlawed-boardrooms-with-no-women-the-impact-on-corporate-america-was-profound

  2. https://listingcenter.nasdaq.com/assets/Board%20Diversity%20Disclosure%20Five%20Things.pdf Updated October 1, 2021.

  3. SEC Approves New Nasdaq Board Diversity Rules. https://www.gibsondunn.com/sec-approves-new-nasdaq-board-diversity-rules/#_ftn11 Updated Aug. 12, 2021.

  4. SHRM (Corporate Board Diversity: Moving Beyond Lip Service. https://www.shrm.org/hr-today/news/all-things-work/pages/boosting-corporate-board-diversity.aspx Accessed Oct. 16, 2021. (Note that you have 3 free articles on SHRM as a free member so print it, but adhere to the SHRM Reuse Policy.)

  5. Rhodes, D. L., & Packel, A. K. (2014). Diversity on Corporate Boards: How Much Difference Does Difference Make? Delaware Journal of Corporate Law. http://www.insurance.ca.gov/diversity/41-ISDGBD/GBDExternal/upload/DelawareJour-Vol39-CorpBoard2014.pdf

  6. Fine, C., Sojo Monzon, V., & Lawford-Smith, H. (2020). Why Does Workplace Gender Diversity Matter? Justice, Organizational Benefits, and Policy. Social Issues and Policy Review, 14 (1), pp.36-72. https://minerva-access.unimelb.edu.au/handle/11343/247755

  7. Kanaldi, S. B., Zhang, P., & Kakabadse, N. K. How job-related diversity affects boards’ strategic tasks performance: the role of chairperson. (2020). Corporate Governance. https://www.emerald.com/insight/content/doi/10.1108/CG-08-2019-0267/full/html?casa_token=xWQM5UCQkMUAAAAA:3sDyGWQQ8dwW6u9hyyb5hLiD_Pw98zEH68CjLObr4EivWImYo3lfTvbxKuJtlq6JMm-aioMqu6TuPrFB7uMaG5KvopUrG_TihYZX4oXwZYlPiAWrfhJy

  8. https://www.inc.com/anna-meyer/diversity-board-directors-covid-pandemic.html#:~:text=Fifty%2Dfour%20percent%20of%20these,companies%20with%20lower%20gender%20diversity.&text=Less%20than%20a%20third%20of,20%20percent%20of%20their%20seats.

Keywords: Justice, Diversity, Boards of Directors, Corporate Social Responsibility (CSR), Leadership

Questions for Discussion

  1. What does it mean to be 'diverse'? SEC defines this as 'self-identified'. What do students think?

  2. Students can read the Nasdaq guidelines here. The site is short with a handful of FAQs for companies. Example question for students: What does it mean to say 'or notify shareholders' if not complying? Who is exempt? What about small companies?

  3. What about corporate boards around the world? Ask students to investigate the problem elsewhere. The LA Times article gives some statistics for other countries. Here is a recent article from The Sydney Morning Herald on Sept. 20, 2021, "Board games: Is a cosy directors’ club a risk to corporate Australia?" (https://www.smh.com.au/business/companies/board-games-is-a-cosy-directors-club-a-risk-to-corporate-australia-20210906-p58p4z.html).

  4. The issue of self-identification may be of interest. How is this accomplished? Are there any difficulties?

  5. Consider the effects of board diversity leadership on employees and customers, not only shareholders. Check out "justice-based gains", perhaps a trickle-down effect, in Fine et al. (2020) article in the sources list.

  6. The importance of the board chairperson and job-related diversity is discussed here in the Kanaldi et al. (2020) article in the sources list. What other types of diversity are there such as job-related and industry-related that help decision making (but clearly are not related to protected classes and a different issue)? There is a great deal of research on deep-level diversity in boards and otherwise.