Corporate Governance

The SEC and Diversity in the Boardroom: The Interests of Investors (Part 2)

By J Robert Brown Jr.

We are discussing diversity in the boardroom and the speech given by Commissioner Aguilar on Sept. 16 at the SAIS Center for Transatlantic Relations (at Johns Hopkins), titled Diversity in the Boardroom is Important and, Unfortunately, Still Rare. 

He notes studies indicating that companies with diversity often do better in the market. 

• Many studies indicate that such diversity in the boardroom results in real value for both companies and shareholders. In fact, a report commissioned by the California Public Employees' Retirement System (CalPERS) found that companies that have diverse boards perform better than boards without diversity.  The report — Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value — stated that companies without ethnic minorities and women on their boards eventually may be at a competitive disadvantage and have an under-performing share value. The report also found that a selected group of companies with a high ratio of diverse board seats exceeded the average returns of the Dow Jones and NASDAQ indices over a five-year period.

In short, an absence of diversity is bad for business.   Then why is diversity so poor at the board level? 

The answer is that until recently there has been little legal pressure to diversify.  The Delaware Supreme Court in Axcelis affirmed that director qualifications were matters of board discretion, reviewable only under the anemic duty of care.  

The duty of care is a process standard that has no real substantive content.  In other words, directors have unlimited discretion with respect to board membership and have no obligation to ensure diversity, even if its good for business. 

While, as we will discuss, investors may see the value in board diversity, they have, until recently, not had any meaningful ability to influence the membership of the board.  Majority vote provisions may allow shareholders to register opposition but it doesn't allow them to effect the candidate selection process.  Besides, so far, majority vote provisions, as the Axcelis case shows, have been ineffective. 

Yet things are changing.  The impetus is coming not from Delaware but from the SEC.  As we shall see in later posts, the legal regime is changing.  They include additional disclosure requirements and shareholder access. 

Full post as published by The Race to the Bottom on September 21, 2010 (boomark / email).