Transforming Corporate Boards

Diversity is a fluid concept

Dambisa Moyo, Ph.D., a Zambian-born global economist and veteran board member who has been named one of Oprah Winfrey’s 20 “remarkable visionaries” and one of Time magazine’s 2019 100 most influential people worldwide, and whose first four books landed on The New York Times Best Sellers list, told SWE Magazine that no one should assume a single definition of diversity — and that the definition will continue to evolve.

“We should not assume one answer,” said Dr. Moyo, who, in her latest book, How Boards Work: And How They Can Work Better in a Chaotic World, argues that corporations need boards that are more diverse, transparent, knowledgeable, and involved in setting the strategic course of the companies they lead.

“Diversity is a fluid concept,” said Dr. Moyo, who serves on the boards of 3M, Chevron, and Condé Nast, and previously served on the boards of Barclays, Barrick Gold, Seagate, and SABMiller. “It is constantly changing.”

The answer is “yes,” as long as the board member’s skills can help deal with what Dr. Moyo calls the five factors on which boards and management teams must focus to truly differentiate themselves: the risks of a more siloed and protectionist world; new technological developments; the global war for talent; massive changes in the investment landscape; and short-termism, whether it’s immediate threats, rapid CEO turnover, startups’ quick takeovers, or concern over having to report quarterly earnings.

“While it’s management’s responsibility to oversee an organization’s day-to-day operations, the board should also heed the deep transformations that are underway, which will dramatically alter the way business is conducted,” Dr. Moyo writes in the book. “Is the company future-proof? Has the board adequately thought through long-term risks? Culture and corporate governance changes should make boards better equipped to tackle these issues. But, even if we accept the inevitability of these changes, the transition will undoubtedly hurt.”

Other experts agree, and say concentrating on only one form of diversity isn’t enough to ensure true equality. A professor who has researched diversity and inclusion initiatives for 15 years said executives, historically, have chosen board members with whom they feel safe and who won’t disagree.

Dr. Creary, as the lead author of a Harvard Business Review article, “When and Why Diversity Improves Your Board’s Performance,” wrote that “a 2015 meta-analysis of 140 research studies of the relationship between female board representation and performance found a positive relationship with accounting returns, but no significant relationship with market performance. Other research has found no relationship to performance at all.”

“We interviewed 19 board directors (15 women and four men) to learn whether and how corporate boards were benefiting from diversity,” according to the research by Dr. Creary and co-authors Mary-Hunter (“Mae”) McDonnell, Ph.D.; Sakshi Ghai; and Jared Scruggs. “Combined, the board members held seats on 47 corporate boards in the U.S. across a variety of industries.”

“The research found that diversity doesn’t guarantee a better performing board and firm; rather, the culture of the board is what can affect how well diverse boards perform their duties and oversee their firms.”

“Companies need to pick people who have a track record of confronting issues of diversity, equity, and inclusion,” said Dr. Creary, who partnered with John W. Rogers Jr., a well-known African American investor, philanthropist, and founder of Ariel Investments, one of the largest minority-run mutual fund firms in the U.S., to offer a guide to how boards can choose directors who can advance racial justice. Rogers, who serves on the board of the Barack Obama Foundation and served as co-chair of then-President-elect Obama’s inaugural committee in 2009, co-founded the Black Corporate Directors Conference to enable African American directors to meet yearly to discuss boardroom equity and inclusion issues.

Dr. Creary and Rogers proposed three board commitments akin to the Sullivan Principles — directives issued during apartheid that encouraged companies to work toward the common goals of human rights, social justice, and economic opportunity. The commitments are outlined in “How Board Directors Can Advance Racial Justice,” an article that Dr. Creary and Rogers co-authored in the Spring 2021 issue of strategy+business.

Selena Rezvani, a Philadelphia-based leadership and inclusion consultant and author of PushBack: How Smart Women Ask — And Stand Up — For What They Want, said boards should also consider whether their members are wealthier than their customers and stakeholders, “go beyond the binary,” and take into account other aspects of diversity such as people with disabilities. “The goal is to bring a mirror of the company’s community to your board,” she said.

Key to instituting the principles is a CEO who’s fully on board, Dr. Creary said. “As long as you have a CEO who doesn’t care, you’re not going to get anywhere,” she said. “The board is the only entity short of state or federal legislation who can pressure the CEO to move.”

Examining the current landscape

How much progress has been made toward achieving racial and gender diversity on corporate boards — and how far do we have to go?

Among the Fortune 100 and the Fortune 500 — Fortune magazine’s annual rankings, by revenue, of the United States’ largest corporations — 200 companies had greater than 40% diversity, an initial percentage goal set by the Alliance for Board Diversity in 2004. That’s nearly four times the number of companies a decade ago, according to public corporate reports reviewed up to June 30, 2020.

The analysis, titled “Missing Pieces Report, 6th edition,” was conducted by Deloitte consultancy, along with the Alliance for Board Diversity, a collaboration among Catalyst, The Executive Leadership Council, the Hispanic Association on Corporate Responsibility, Leadership Education for Asian Pacifics, The Prout Group Inc. partners Pat Prout and Betsy Bruening, and Diversified Search.

Mandates and activism push progress

A Houston-based board member with 35 years of financial experience in the energy industry says she’s starting to see the world’s largest institutional investors wield their influence in pushing board diversity, and directors are taking notice.

“Disruptive forces in today’s business world are changing the long-standing culture of public company boards,” said Carla Mashinski, chief financial and administrative officer for Cameron LNG and an independent board member of Dallas-based Primoris Services Corp., one of the country’s largest specialty construction, fabrication, maintenance, and engineering services.

In fact, the “Big Three” of the passive index fund industry — BlackRock Inc., Vanguard, and State Street Global Advisors, which together constitute the largest shareholder in 88% of the companies in the S&P 500, a U.S. stock market index that tracks 500 publicly traded domestic companies — have announced they will press companies for details about their metrics and goals to boost racial diversity within their ranks. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions.

Goldman Sachs said in February 2020 it would no longer take companies public unless they had one diverse board candidate. And the Nasdaq stock exchange announced in December 2020 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.

Only about one in three companies listed on the Nasdaq exchange meet that criteria — so if its proposal is approved by the Securities and Exchange Commission, it could trigger a big shift in board nominations.

California Governor Gavin Newsom on Sept. 30, 2020, signed into law a bill that requires 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.

However, a federal appeals court on June 21 (2021) ruled that an investor may sue California over the law after the shareholder argued that the law unconstitutionally required him and other shareholders to discriminate on the basis of sex when electing directors. The three-judge panel of the Ninth U.S. Circuit Court of Appeals reversed a lower court’s dismissal of the case and said the shareholder could make the case that he had been injured by the law and that his injury was distinct from any injury that the company itself might have incurred.

At least 11 other states have enacted or are considering board diversity legislation. None of these proposed or existing statutes mandates minimum numbers of female directors. Instead, they focus on disclosures about diversity on the boards of directors, and in some instances, senior management. Colorado, Maryland, Illinois, and New York have enacted some sort of board diversity mandate.

Mandatory requirements are an effective tool

Companies in Europe, led by Norway two decades ago, have had mandatory requirements for female directors for years. Norway has met its requirement of 40% of women on company boards since its inception in 2003. The percentage stood at 44% in Norway in 2020. Belgium, France, Germany, Iceland, India, Israel, Italy, Norway, Pakistan and Spain have all legislated quotas for women on corporate boards of publicly listed companies, according to a recent World Bank report.

Other efforts to ensure corporate board diversity include binding quotas in Belgium, Germany, France, and Italy, and quotas without sanctions or that are applicable only to public companies in Denmark, Ireland, Greece, Spain, Luxembourg, the Netherlands, Austria, Poland, Portugal, Finland, Sweden, and the United Kingdom, according to the European Women on Boards Gender Diversity Index 2020.

It’s worth pointing out that the use of quotas as a tool for greater equity is perceived differently from country to country. Illustrating the point, is a September 2018 CNN story, “The Case for and Against Gender Quotas on Corporate Boards.”

The latest move came June 11, 2021, when the German Parliament adopted a proposal that would require public companies with four or more board members and government-controlled firms with boards of three or more to have one female board member. Germany’s upper house is expected to approve the measure during the summer. Companies would face financial penalties for failing to meet the mandate.

In the 20 economies comprising the Asia-Pacific region, women hold 15% of board seats at 1,573 top companies, according to the Corporate Women Directors International’s 2020 Report, “Women Board Directors of Asia-Pacific.”

The women directors group also reported:

• Asia-Pacific’s 15% women on boards lags Northern Europe (37%), United States/Canada (29%), Western Europe (26.5%), Central and Eastern Europe (19%), and Sub-Saharan Africa (19%).
• Only Latin America (8.3%) and the Middle East and North Africa (MENA) region (3.7%) have lower women’s board representation than the Asia-Pacific region.

Yet debate continues as to which is more effective: government mandates or internal shareholder proposals to ensure ideal board diversification.

A research paper, “Gender Diversity on Corporate Boards: Evaluating the Effectiveness of Shareholder Activism,” concluded that “improvement in board gender diversity is more responsive to private negotiations than to social pressure” and that “institutional investors are more effective in bringing gender diversity to corporate boards.”

The authors, Mahdi Rastad, Ph.D., associate professor of finance, and John Dobson, Ph.D., professor of finance, at California Polytechnic State University in San Luis Obispo, said they reviewed, among other resources, shareholder proposals that had been withdrawn prior to shareholders meetings. The resulting behind-the-scenes negotiations over the proposals for greater board diversity ended up having the most effective results.

Addressing issues surrounding compensation

Scrutiny of chief executive officers’ and directors’ pay is growing. At the height of the coronavirus pandemic, median pay for S&P 500 CEOs reached $13.4 million in 2020, setting a fifth straight yearly record, according to a Wall Street Journal analysis of data from MyLogIQ. Most of the CEOs enjoyed raises of 5% or more, and their companies reported annual shareholder returns of about 8%, the analysis revealed.

A separate survey showed CEOs received 274 times the pay of the median employee at their companies, compared with 245 times in the prior year, according to Equilar’s analysis for The New York Times. CEO pay increased 14.1% during COVID year 2020 from 2019, while median workers’ raises inched up 1.9%, the research showed.

Institutional Shareholder Services, a major proxy and corporate governance advisor, has introduced a policy spelling out that it would consider excessive a non-employee director’s total pay in the “top 2% of all comparable directors.” The Council of Institutional Investors is pressing companies to require that directors hold a meaningful portion of their equity grants until after they retire from a board.

A U.S. corporate director’s average annual pay is $107,105, a ZipRecruiter survey showed. While ZipRecruiter found annual compensation as high as $186,000 and as low as $26,500, the majority of corporate director compensation ranged from $76,000 (25th percentile) to $134,000 (75th percentile), with top earners (90th percentile) making $166,000 annually.

Meanwhile, top corporate advisory firms are reviewing how well board members’ compensation aligns with a company’s best interests.

To mirror the company’s community and customers

In January, big names such as Nike, McDonald’s, and Starbucks announced initiatives to add diversity goals to their top executives’ to-do lists. They will now reward top executives who improve racial and gender diversity in the workforce and among the company’s leadership ranks, either by granting them more company shares or by tying their pay to meeting those goals.

A diverse board can have a powerful effect by delving into how employees are paid and rewarded, and by pursuing greater equity throughout the ranks, consultant Selena Rezvani said. In fact, research has shown that more women on corporate boards, but not in executive positions, is associated with greater numbers of women filling management jobs. Diverse boards bring forth diverging viewpoints, and, though that can be tough for people to deal with cognitively, Rezvani said, the result often is more careful and thoughtful decision-making.

“I’m a big believer that you need to see it to be it,” she said. “Don’t underestimate the waterfall effects of people looking up and seeing visibly diverse people governing the organization.”