Corporate Board Diversity Requires Vigilance

Observers warn to expect pushback after two judges separately rule as unconstitutional California’s diversity quota laws.

By Sandra Guy, SWE Contributor

America’s corporate boards are slowly — some would say excruciatingly slowly — becoming more diverse, looking less and less like the “old, male, and pale” stereotype. The most recent research shows women held 19.7% of corporate board seats globally, up just 2% from 2018, and that women held 23.9% of board seats in the United States.

Ethnic and racial minorities accounted for 47% of all new directors in 2021 among the 500 large companies listed on U.S. stock exchanges, known as the S&P 500. That compared with 22% in the prior year, according to a Spencer Stuart report issued in October 2021. Nearly all of the increase came from the appointments of Black directors, who made up 33% of new board seats from May 2020 through May 2021, up from 11% in the prior period.

Michael Peregrine, J.D., partner, McDermott Will & Emery. Credit: McDermott Will & Emery
Corinn Jackson, J.D., principal, Littler Mendelson. Credit: Littler Mendelson
Susan Angele, J.D., senior advisor, KPMG Board Leadership Center. Credit: KPMG

Yet board members who cheer diversity, equity, and inclusion (DEI) must steel themselves for a new fight, one expert said, after two Superior Court judges ruled in separate decisions that California’s efforts to mandate diversity quotas for public corporate boards of directors violated the Constitution.

“It’s the one insidious aspect [of the judges’ rulings] — that people will misread them as a denunciation of the benefits of diversity,” said Michael Peregrine, J.D., a partner in the McDermott Will & Emery law firm’s Chicago office.

Diversity advocates should remind their skeptical colleagues that research shows that DEI efforts allow corporate boards to make better decisions, especially now that globalization; cybersecurity; climate change; multicultural awareness; and environmental, social, and governance investing have emerged as top concerns, said Peregrine, who represents private, public, and nonprofit corporations on corporate governance issues.

“They should keep asking, ‘Why is diversity good for our corporation?’” he said.

The California laws required quotas — or certain numbers of corporate board seats — be set aside for women or those from underrepresented communities, and imposed penalties for failing to do so.

Corinn Jackson, J.D., principal with global labor and employment law firm Littler Mendelson, which advises corporations on developing and implementing DEI initiatives, said antidiscrimination laws generally prohibit employers from setting workplace quotas for hiring or making any other employment decisions based on an applicant’s or employee’s race, gender, or other protected category.

But Jackson emphasized that corporations should anticipate consumer and public demand — and legislators and regulators — to continue to expect more commitment to broadening board diversity.

“The best boards that I know are really intentional about creating a culture in which people’s differences are brought out to add value.”

– Susan Angele, J.D., senior advisor, KPMG Board Leadership Center

“Comply or explain”

Regulators and other states, besides California, are increasingly adopting what Jackson calls a “comply or explain” approach to board diversity legislation and regulation.

That’s how the Nasdaq stock exchange handled it when, in December 2020, it announced that it would require companies listed on its exchange to have two diverse directors on their boards or explain why they are not capable of doing so. Opponents have appealed Nasdaq’s policy to the Fifth Circuit Court of Appeals, which has yet to rule.

Washington state, for example, enacted in March 2020 a law requiring that by January 2022, public companies based in the state have 25% of their members be people who self-identify as women. If that hasn’t happened, the organization must disclose its diversity efforts to shareholders.

Jackson said that “public disclosure — and the related review of a board’s selection process leading to such low numbers of board members from underrepresented groups historically — may ultimately generate a market-based pressure sufficient to fuel an organization’s board diversity efforts.”

That’s because a review process can propel a corporation to think across the organization and to scrutinize the company’s policies surrounding DEI more thoughtfully — and with greater transparency, she said.

That means a board should review whether the company has created employee resource groups for women and for employees from other underrepresented groups; worked with diverse vendors and professional organizations; and reached out as extensively as possible to find new hires and new board members.

“The goal is to figure out, ‘What can we do to improve the representation of women and other underrepresented communities on our board and in our workforce?’” Jackson said. “‘What are we doing to broaden our applicant pools? Are we going to the same people we’ve always known as board candidates? How can we expand our look at what qualifications we really need for board members? Are there people we’re eliminating who we could be including?’”

 “What are we doing to broaden our applicant pools? Are we going to the same people we’ve always known as board candidates? How can we expand our look at what qualifications we really need for board members? Are there people we’re eliminating who we could be including?”

– Corinn Jackson, J.D., principal, Littler Mendelson

Next steps on the board to-do list

What can boards do?

Peregrine advises his clients, among other steps, to consider:

  • Increasing the rate of board membership turnover to create more opportunities for people from diverse backgrounds to get elected
  • Discreetly increasing the size of the board to make room for more diversity
  • Heightening the board’s focus on director succession planning and its consideration of diversity-related measures

Susan Angele, J.D., senior advisor with the KPMG Board Leadership Center, said she loves the term “creative abrasion” as its business leaders’ new phrase for thoughtful boardroom practices.

“The best boards that I know are really intentional about creating a culture in which people’s differences are brought out to add value,” Angele said. “The best board leaders have strong emotional intelligence, go in to facilitate discussion, encourage everyone to be on top of their game, and create a dynamic in which the group meshes together to make the whole a lot better than the sum of its parts.”

“The best board or committee chair likes to think of [their] job as something like conducting a symphony,” Angele said. “They’re not there to tell everyone what to do, but to bring out quality, interaction, and to make for a great environment with a lot of rich discussion.”

Another encouraging sign is that small and midsize companies are seeking greater diversity on their boards and in their leadership ranks, Angele said. That includes making sure that Asians, Latinas/Latinos/Latinx, Native Americans, LGBTQA+, and other communities gain a voice.

Angele works to connect companies with groups such as Ascend Pinnacle, the Women Corporate Directors Foundation, the African American Directors Forum, the Latino Corporate Directors Association, and the LGBTQA-focused OUT Leadership.

The multitude of these kinds of membership and leadership development groups puts the lie to any notion that diverse candidates lack experience or qualifications, she said. “Wow! There’s a lot of talent there,” she said. “There are dozens, if not hundreds, of organizations that list board-ready executives. It’s a matter of [practicing] intentionality and continuing to look.”

“Anecdotally, I’ve been told stories over and over about people who do exercise that intentionality, look beyond their networks, and find people they never knew existed who turned into the most phenomenal board members,” Angele said.

Angele says she tells aspiring board members to think about the three buckets of qualification and the “T.”
Her advice:

  • Make sure you have the credentials. The top horizontal line of the board-qualification “T” is always going to be “business, business, business.” That means understanding strategy, capital allocation, capital markets — all of the aspects of how a company does business.
  • The long vertical piece of the “T” centers on building an expertise, whether it’s in stock buybacks or CEO compensation. The expertise is going to vary board by board, so figure out what a board lacks in fulfilling its matrix of needed skills.
  • Network, network, network, and network some more. It’s all about amplification.

The Background Details: California Laws on Board Diversity Dealt Two Legal Blows

California Gov. Gavin Newsom on Sept. 30, 2020, signed into law a bill that required publicly held companies headquartered in the state to include board members from underrepresented communities. The action followed passage of a similar law in 2018 mandating that public companies headquartered in the state have at least one woman on their boards of directors by the end of 2019, with further future increases required depending on board size.

On April 1, 2022, Judge Terry Green of the Superior Court of California, County of Los Angeles, ruled that the secretary of the state had failed to identify a compelling interest to justify the state statute mandating board inclusion of underrepresented communities.

Green also ruled that the state legislature had failed to define a specific arena in which the discrimination occurred, and that the state had failed to produce convincing evidence of “valid statistical comparisons and anecdotal testimony of discrimination.”

On May 16, Los Angeles Superior Court Judge Maureen Duffy-Lewis ruled that the 2018 law mandating corporate board gender diversity quotas violated the equal protection clause of California’s constitution. She found that the California secretary of state had failed to show the law was narrowly tailored or that it was meant to remedy “specific, purposeful, intentional and unlawful discrimination,” according to her ruling.

Despite the rulings, research has shown that members of underrepresented groups who serve on corporate boards often feel ignored and invisible.

Research by KPMG consultancy showed that one-third of 67 respondents who identified themselves as a member of an underrepresented group on a company’s board identified challenges such as dominated discussions (22%), discounted opinions (12%), and lack of an encouraging board culture (10%).

The research also showed that 38% of company directors polled said they were moderately concerned that the lack of diverse views hampered insightful discussion or identifying blind spots.