In recent years, just a third of corporate directors polled by PricewaterhouseCoopers have designated racial and ethnic diversity a “very important” board composition consideration. Yet between shareholder proposals and state-mandated quotas, the tide is turning.
How can businesses and investors keep moving racial diversity on corporate boards toward greater equity and inclusivity?
Racial Diversity on Boards
While issues of diversity, equity, and inclusion have seen more widespread and mainstream attention in 2020, professionals of color remain woefully underrepresented at the highest levels. Using data from proxy advisor Institutional Shareholder Services (ISS), the New York Times reports that directors of color hold just 12.5% of over 20,000 board seats on the Russell 3000 index, a marginal gain from 10% in 2015. Among that group, Black directors comprise 4% of the total, while Black women make up only 1.5%.
If the problem is clear, the solution is far from simple. According to the Harvard Business Review, ingrained recruitment practices limit the number of candidates of color considered for open seats, especially on all-white boards. The significant role that social networking plays in board recruiting helps maintain homogeneity. At the same time, systemic discrimination at lower executive levels results in fewer candidates of color in the pipeline for board seats. Once appointed, Black board members tend to spend as much time on board service as their white peers; however, they are less likely to chair committees that control the board pipeline, like the nominating committee.
Paths to Boardroom Inclusivity
Potential strategies for improving boardroom diversity are varied. For example, boards themselves can set minimums on candidates for open seats, set retirement ages and term limits to help refresh board makeup, and use executive search firms to find candidates outside the current board’s typical social networks. Building social connections between current diverse directors can help set the stage for ongoing diversity, equity, and inclusion.
On the regulatory front, US lawmakers have typically favored disclosure requirements, as they are more flexible than quotas. The Securities and Exchange Commission recently amended its required disclosures for characteristics such as race, gender, and sexual orientation. Yet a recent California mandate under consideration is stricter, requiring quotas from racially underrepresented communities on all California boards.
Investors dedicated to promoting racial equity in their portfolios and interested in gaining the potential benefits of diversity on performance have begun using their leverage as shareholders to drive change. As You Sow’s 2020 Proxy Preview report cites upwards of 40 shareholder proposals seeking to improve board diversity generally. ISS has asked companies to disclose the races and ethnicities of directors and named executives, and in October 2020 it announced a US diversity index based on “broad ethnic and gender representation” in the highest corporate leadership levels. In December 2020, Nasdaq announced a proposal that would require most companies listed on the exchange to have at least one woman and one member of a marginalized group on their boards; the proposal would also require disclosure of board diversity statistics.
Despite overall slow gains, today’s boards have more perspectives than ever before. As investors and other stakeholders continue working to accelerate that trend, harnessing the power of positive change at the top can help drive improvements at all levels. “Boards should hold themselves and management accountable for specific objectives around recruitment, retention and promotion of African Americans and other minorities,” Ford Foundation president Darren Walker told the New York Times. “Only when companies and management are accountable in ways that are quantifiable will we see real systemic transformation of corporate America.”