Understanding the Business of Corporate Board Diversity

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Experts discuss the benefits of diversifying corporate boards of directors.

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In a pool of 1,000 of the largest companies in the United States, women only sit in roughly one-quarter of the board of director seats. In addition, 83 percent of individuals who serve as directors on the boards of Fortune 500 companies are white.

U.S. corporations lack diverse people at the heads of their operations—a fact made more apparent during the coronavirus pandemic. Rates of unemployment, personal loss, and food scarcity have soared, particularly among women, people of color, and low-income workers.

In 2020, California forged the way for board diversity legislation when Governor Gavin Newsom signed Assembly Bill No. 979. The law mandates that public companies with headquarters in California have at least one minority director on their boards by the close of 2021. This piece of legislation followed California Senate Bill No. 826, enacted in 2018, which requires female representation on corporate boards.

On the heels of the California law, lawmakers in 12 other states advanced similar corporate board diversity initiatives. These newly introduced board diversity proposals either order board diversity, encourage board diversity, or require disclosures relating to information on board diversity.

Currently, the Securities and Exchange Commission’s (SEC) federal regulations on board diversity mainly entail disclosure requirements for companies, including a rule that compels companies to disclose how diversity is considered for board membership.

In August 2021, the SEC approved additional board diversity disclosure obligations for Nasdaq-listed companies. According to the Nasdaq Board Diversity Rules, companies must publicly disclose two items: the reasons why they fail to have a minimum of two diverse board members and yearly board diversity statistics.

In this week’s Saturday Seminar, experts consider the implications of increasing regulations on corporate board diversity.

  • More regulations will not improve corporate compliance related to diversity and discrimination, argues Cheryl L. Wade of John’s University School of Law. In an article published in Loyola University Chicago Law Journal, Wade explains the shortcomings of SEC Board Diversity rules and Section 342 of the Dodd-Frank Wallstreet Reform and Consumer Protection Act and how corporate leaders can improve corporate compliance with antidiscrimination law without more regulations. Wade recommends a “principles-based approach to corporate governance.” This approach centers empathy in the quest to identify and remedy antidiscrimination compliance issues, rather than focus on minimum compliance with laws and regulations.
  • The probability that a woman will be selected as a director instead of a man decreases by 28 percent when the incumbent directors are associated with the new appointee, found Isabelle Allemand and Bénédicte Brullebaut of France’s Burgundy School of Business, Jean Bédard of Université Laval, and Jérôme Deschênes of the Université du Québec en Abitibi-Témiscamingue. In their recent study published in the British Journal of Management, Allemand and her coauthors examined 32,819 new board appointments at 17 firms across Europe, the United States, and Canada. One phenomenon behind the 28 percent decrease in the appointment of women is often described as a result of “old boys’ networks,” explain Allemand and her coauthors. Allemand and her coauthors argue gender board diversity regulations are effective in lessening the effect of the “old boys’ network” on gender disparities in corporate boards appointments.
  • Securities regulators can play a significant role in increasing female participation on corporate boards, Diana Nicholls Mutter of SkyLaw argues in an article published in The International Lawyer. Mutter explains that corporate entities should be viewed as social institutions—rather than solely shareholder wealth maximization institutions—to justify regulation based on the “normative case,” which states that inclusion on boards is a moral imperative. Mutter recommends that regulators in Canada and the United States use both the normative case and the “business case,” which states that female representation on boards results in better business functioning, to rationalize increasing regulatory action for board diversity.
  • In an article for Texas Law Review, Jeffrey Meli of Barclays and James Spindler of The University of Texas at Austin School of Law interrogate the connection between governance inclusion initiatives on corporate boards and societal decisions. Meli and Spindler emphasize that inclusion of minority groups on boards would likely lead to change that is socially beneficial to the represented group, resulting in a decrease of harm to that newly included group in board decisions. They warn that inclusion mandates often lack accountability structures—diverse directors are still accountable only to the rest of the board. Meli and Spindler recommend creating a framework of accountability to promote socially responsible corporate behavior through a constituency mandate, in which board representatives are made accountable to groups with substantial interests.
  • Corporate law empowers fiduciaries to adopt ambitious diversity, equity, and inclusion (DEI) policies, which serve corporations’ best interests, argue Chris Brummer of Georgetown University Law Center and Leo E. Strine Jr. of the University of Pennsylvania Law School in a forthcoming article in the Vanderbilt Law Review. Brummer and Strine explain that corporations that fail to comply with civil rights laws and antidiscrimination laws could trigger lawsuits, fines, and other regulatory harms. More importantly, they propose that effective DEI policies will help leaders create sustainably resilient and profitable corporations. Brummer and Strine argue that external regulation fails to embed values and norms in complex organizations unless business leaders support them. Corporate leaders must embrace DEI values in their approaches to stakeholders and society.
  • Gender quotas alone may not reduce gender disparities in firms, Agata Maida of the University of Milan and Andrea Weber of the Central European University suggest in a discussion paper for the Institute of Labor Economics. Upon evaluating an Italian mandate of female board quotas, Maida and Weber did not find any increase in female representation at the top executive level. Maida and Weber suggest that extending the mandate to a wider range of companies may lead to a higher representation of women as top executives, top earners, and general members of the workforce.

The Saturday Seminar is a weekly feature that aims to put into written form the kind of content that would be conveyed in a live seminar involving regulatory experts. Each week, The Regulatory Review publishes a brief overview of a selected regulatory topic and then distills recent research and scholarly writing on that topic.