Corporate Governance

Diversity, the Board of Directors, and Access

By J. Robert Brown

We have discussed a number of times on this Blog the problems of lack of diversity on boards of directors.  The term diversity here is used not just to signify women or people of color, but also persons with backgrounds that differ from top management.  We have labeled boards that look like the CEO "mirror image" boards.

The concern is that the lack of diverse view points on the board is disadvantageous to the company and top management.  We discussed whether greater diversity on the board, for example, would have resulted in Exxon taking a less vociferous stance against efforts to curb global warming. 

In that context, we note the article by the WSJ that shows just how much resistance to this idea there is in corporate America.  The article notes that with the onset of SOX and improvements in the nominating process some hoped to see an increase in diversity on boards but in fact, the "percentage of board seats minorities hold has barely budged since 2000."  In fact, the number of companies in the S&P 500 with no minority representation increased from 36% in 2000 to 41% in 2007.  The number of women of color has declined from 3.7% in 2003 to 3% in 2007. 

What is the explanation for this?  According to the article, a significant reason is the small pool of candidates.  The emphasis in board selection is on retired corporate executives, a category generally bereft of people of color.  In fact, retired CEOs account for 14% of new independent directors in 2007, an increase from 11% in 2002.

The premise that diversity would increase in the aftermath of SOX is surprising.  SOX itself had nothing to do with nominating committees.  On the other hand, the exchanges did put in place new listing standards at roughly the same time that required companies to have nominating committees and to staff them only with "independent" directors.  Moreover, the SEC significantly increased the disclosure surrounding nominating committees, essentially attempting to isolate the source of any new nominee (and the role played by the CEO in the selection). 

It is, however, a mistake to think that largely superficial reforms of the nominating process will result in some change in the composition of the board of directors.  As we have discussed often, "independent" directors are not necessarily independent and the use of disclosure to try to reduce CEO influence doesn't work.  These requirements are discussed at length in the paper, Corporate Governance, the SEC and the Limits of Disclosure.

The best way to ensure that boards have directors who are more diverse in background?  In Europe, the solution is to compel diversity through changes in the law.  In the US, the best way to do so is to give shareholders greater access to the company's proxy statement for their nominees.  But, as we know, this is not the position of the current Commission.   

Full post as published by The Race to the Bottom on January 17, 2008 (boomark / email).