As issues of diversity and inclusion continue to take center stage in the corporate world, investors and the broader public are looking ever more closely at how companies stack up on a range of criteria.
Gender diversity on boards is one important measure of companies’ overall commitment to diversity. A new report from the Alliance for Board Diversity (ABD) and Deloitte sheds light on the progress made in recent years.
Fresh Insights Point to Growth in Diversity
ABD and Deloitte conclude that companies in the Fortune 500 continue to make improvements in board diversity, but that the movement lags behind the broader demographic changes taking place across the United States.
The report finds that 145 companies had more than 40% diversity on their boards in 2018—twice the number at that level in 2012. Black and Asian women made the biggest percentage gains in board seats, although their actual representation remains small. If progress continues at its current rate, the share of women and minorities on all boards could reach 40% by 2024, four years past ABD’s target.
The increased gender diversity on boards doesn’t necessarily mean that there are new voices entering corporate boardroom. The “recycle rate”—the rate at which directors serve on more than one board—is higher for women and minorities than it is for white men. One reason for this could be the historic preference for board members who have already been CEOs or served on boards of other companies. Since relatively few women and minorities have held those positions compared to white men, the same individuals may be “recycled” on multiple boards.
The study’s authors suggest that to increase diversity, companies may need to expand the experience and background they’re looking for when choosing board candidates. Still, novice candidates can be a risk for companies, and they often need additional training to get up to speed on the requirements of the role. Making a board more diverse means more than simply checking a box, David Larcker, professor at Stanford’s Graduate School of Business, recently told Bloomberg. “It’s going to take some give and take on both sides.” Even so, many corporate boards seem up to the task. Last year, a full third of newly appointed board members were taking on the role for their first time, according to data from recruiting firm Spencer Stuart.
New Research and Regulations Are Moving the Needle
There are signs that further progress may be on the way for gender diversity on boards. One reason for the positive outlook is that more regulators are calling for increased transparency around board diversity and making organizations accountable for creating change. California has required companies headquartered in its state to hit diversity quotas on their boards or else pay a fine. In New York City, comptroller Scott Stringer has launched the Boardroom Accountability Project 2.0, which requests that the boards of more than 150 companies disclose information on the race and gender of their directors. “This push, if successful, could encourage more boards to be diverse and independent,” write the authors of the ABD/Deloitte report.
Advocates for boardroom diversity also have the support of a continually growing body of research showing that companies with diverse boards may perform better. A report by MCSI released last year found that the presence of at least three women on a corporate board represents a “tipping point” that may lead to superior financial performance. A separate study published in the Journal of Business Ethics suggests that gender-diverse boards make fewer financial reporting mistakes and are less likely to engage in fraud.
Large asset managers are also upping pressure on companies to ensure that their boards become more diverse. In 2017, State Street pledged that it would vote against the reelection of chairs and senior members of corporate boards it deemed lacking in diversity unless those senior members committed to improving the diversity of their boards. The company said that this pressure led to the addition of female board members at more than 300 companies and that it plans to continue the campaign in the future. BlackRock CEO Larry Fink also highlighted the importance of having women on boards in his 2018 letter to public company executives.
“Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset,” wrote Fink. “They are less likely to succumb to groupthink or miss new threats to a company’s business model. And they are better able to identify opportunities that promote long-term growth.”