"Most Large Companies Fail To Comply With Rules About Diversity In Boardrooms"
In 2010, new rules from the Securities and Exchange Commission (SEC) went into effect that required companies to disclose information about the consideration of diversity when they select their boards, the first rules or regulations to directly address the dearth of women on corporate boards. But a forthcoming research note from Columbia Law School student Tamara Smallman finds that three years later, most companies are failing to comply. Meanwhile, diversity in boardrooms remains stagnant.
The new rules require public companies to disclose “whether diversity is a factor in considering candidates for nomination to the board of directors, how diversity is considered in that process, and how the company assesses the effectiveness of its policy for considering diversity.” However, the SEC’s definition of diversity is flexible and does not necessarily mean gender or race. It also noted that the changes were “not intended to steer behavior,” but felt that they would show companies the benefits of creating more diverse boards.
The SEC itself has acknowledged that “the corporate track record for disclosure under this new requirement is quite spotty so far.” Smallman examined proxy statements from Fortune 50 companies and found over 60 percent fail to fully comply with the requirements, meeting just one or two of the three aspects, while 10 percent didn’t mention diversity at all. Specifically, 12.5 percent contained a single statement about whether diversity was considered in the board nominating process and nearly half mentioned whether and how diversity was considered but not its effectiveness. One company, Berkshire Hathaway, explicitly rejected considering diversity for directorships. Just a quarter fully complied with the requirements by explaining whether and how it was considered as well as how effective it was, although most of them barely touched on the latter part.
Meanwhile, nearly a third of the companies say they don’t have a concrete diversity policy. And given that the SEC’s definition of diversity is vague, only 44 percent appear to take gender into consideration, while the rest rely on more abstract ideas such as backgrounds, perspectives, and experiences.
In looking into the proxy statements, Smallman finds a glaring lack of diversity on Fortune 50 boards. Women make up just 20.6 percent of board seats, which amounts to an average of just over two women directors per board. Among the larger pool of Fortune 500 companies, women hold just 16.6 percent of board seats. Even worse, last year was the seventh consecutive year without any growth in that figure and it risen less than two percentage points since the SEC’s new rules went into effect.
While the U.S. still relies on mostly voluntary efforts to raise these numbers, other countries have taken a firmer stance, beginning with Norway, which enacted a quota system requiring that boards be composed of 40 percent women by 2008. Other countries such as Spain, France, Italy, the Netherlands, and Belgium have passed similar laws. And there is ample evidence that mandatory quotas work at increasing gender diversity. European Union Justice Commissioner Viviane Reding has tried to pass such a law for the entire area, which has garnered support from International Monetary Fund President Christine Lagarde.
Increasing diversity in boardrooms is not just a matter of equity, but a matter of good business sense. One study found that companies on a particular index with gender diverse boards outperformed male-only ones by 26 percent over six years. Another study of Israeli companies found that those with boards that had at least three directors of both genders at meetings had a significantly bigger return on equity and net profit margin. Yet another found that the stock price of companies with women on their boards outperformed those without any women.