How Diverse is Your Company’s Board of Directors?

Diversity is a buzzword in strategic management today. In February, the Advisory Committee on Small and Emerging Companies recommended that the Securities and Exchange Commission (SEC) expand the disclosure rules about board member diversity. Here are some advantages that diversity brings to public company boards of directors, as well as private company management teams — and proof that diversity is a positive, but slow growing, trend.

Diversity counts

Getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. At a recent speech at the University of Tennessee at Knoxville, SEC Chief Accountant Wesley Bricker said, “Diversity of thoughts diminishes the extent of group thinking, and diversity of relevant skills (for example, industry or financial reporting expertise) enhances the audit committee’s ability to monitor financial reporting.”

Bricker is urging public company audit committee members to consider putting diversity on their agendas in the coming year. He said investors have been “appropriately” focused on increasing corporate board diversity, and they want companies to disclose the extent to which their boards are diverse in race, gender and ethnicity. According to Bricker, academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable after poor financial performance.

This concept also extends to private companies: Management teams with people from diverse backgrounds and/or functional areas expand the business’s abilities to respond to growth opportunities and potential threats.

Growth in diversity is slow

A recent proxy season preview by Ernst & Young found that over half of the investors think board diversity should be a board priority in 2017. The study also reported that gender diversity on boards continued to advance at a slow pace in the United States.

The proportion of women-held directorships among Standard & Poor’s 1500 index companies grew only 1% in 2016, with just 18% of those board seats now held by women. The 1% growth rate has stayed consistent over the last five years, suggesting that parity won’t be reached for more than 30 years.

“[Investors surveyed] stress that board diversity is about boards making better, more robust decisions, as well as setting the tone at the top for the diverse talent the company seeks to attract,” the Ernst & Young report noted. “[Investors] want to see boards make diversity an active consideration and develop a culture of inclusion that brings diverse director voices to bear in board discussions.”

Future is uncertain

In 2009, the SEC issued Release No. 33-9089, Proxy Disclosure Enhancements, to set a number of disclosure rules, including the extent to which the company considers diversity in selecting board candidates. But several institutional investors — including the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund — said the requirements don’t provide enough information and haven’t sufficiently increased diversity on corporate boards. In the meantime, the SEC’s Advisory Committee on Small and Emerging Companies has made a set of recommendations for improving the disclosure rules about the diversity of boards of directors.

Former SEC Chair Mary Jo White had made better disclosures about boardroom diversity a priority for rulemaking. Last year, her staff prepared a rule proposal for the SEC to consider. However, White left the agency in January, at the end of the Obama administration, before considering the staff’s recommendation.

© 2017