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Director Diversity = Dollars

    Client Alerts
  • October 25, 2011

For many years, companies have acknowledged that diversity in the board of directors is a worthy goal. In 2003, U.S. stock exchanges began to require listed companies to have corporate governance guidelines that include a summary of director qualification standards, which restarted the dialogue around board diversity. Many public companies included language advocating board diversity in their guidelines.

More recently, there has been a worldwide push for regulations designed to increase diversification on corporate boards:

  • In 2005, a quota law was put in place in Norway mandating that at least 40% of public company directors be female by 2008.
  • The U.K. Corporate Governance Code was revised in 2010 to require listed companies to “pay due regard for the benefits of diversity on the board, including gender” when searching for or appointing directors.
  • In late 2009, the U.S. Securities and Exchange Commission (SEC) adopted a rule that required disclosure regarding how diversity is considered in the director nomination process.

Despite this trend, statistics show that U.S. public companies continue to resist change. For example, although women represent half of the U.S. population, according to the 2010 census of the Alliance for Board Diversity women represented 15.7% of the directors on FORTUNE 500 corporate boards. The percentage is likely to be significantly less for smaller companies.

Even with universal recognition of the importance of board diversity, companies have historically defaulted to valuing “fit” above other considerations when selecting nominees to fill board vacancies, which frequently means selecting candidates that look and act like the current directors. The idea (spoken or unspoken) is that adding a female or minority director will negatively affect board chemistry or camaraderie and, as a result, make the board less effective. This argument sounds particularly compelling if the board already seems to be functioning smoothly.

Until recently, appeals for increased board diversity have depended on altruism and social conscience. They are often met with responses like “Diversity is important, but I really just want the best person available.” However, recent studies specific to female directors indicate that diversity of board composition makes public companies more profitable. Board diversity translates into bottom line dollars, thereby changing the analysis. The days of considering only director candidates who “fit in” are swiftly coming to an end.

In a September 2010 SEC speech on diversity, Commissioner Luis A. Aguilar altogether ignored Hobbesian ideals of equality and the tired (if true) claims that diversity enriches corporate culture. Rather, he focused on the tangible, bottom line value that board diversity brings:

  • In a 2007 study by Catalyst, FORTUNE 500 companies with a larger number of women on their boards outperformed those with lower female board representation by 53%, 42% and 66% in terms of return on equity, return on sales and return on invested capital, respectively.
  • The results of a Oklahoma State University study, published in 2003 in “Corporate Governance, Board Diversity, and Firm Value,” show that there is a significant positive relationship between the fraction of women on corporate boards and firm value.
  • The report “Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value” 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.

The pundits differ on the reasons behind the superior performance of corporations with gender balanced boards. The reasons posited include the following:

  • Because women have to work harder to make it to the board room, female directors tend to be the cream of the crop.
  • Women’s skills in certain arenas exceed those of their male counterparts (e.g., people and cash flow management).
  • A significant female presence on corporate boards engenders more opportunities for creative thought and open-mindedness.

Whether these reasons or others explain the data, studies continue to show a compelling correlation between corporate performance and board diversity.

In light of the new data, companies may wish to give further consideration to board diversity. Several strategies can be employed by public companies to increase female and minority board representation:

  • Leverage commercial relationships with diverse suppliers, customers or other business partners to find diverse candidates with strong skills and industry knowledge.
  • Make it a practice to always interview female and minority director candidates before making nominations.
  • Specifically instruct search firms to seek diverse candidates.
  • Solicit recommendations from organizations that have a reputation for identifying candidates with diverse backgrounds, such as CalPERS Diverse Director Data Source or the University of North Carolina School of Law Director Diversity Initiative.


Additional Articles from the Fall 2011 Public Company Forum


A Proxy Advisor’s Negative Recommendation on Say-on-Pay: How Much Should You Care?

Is it Bigger than a Breadbox? Navigating Materiality

What’s Market? Are Press Releases Passé?

Dodd-Frank Act Progress Report: Fall 2011