Why Directors Reject Diversity Mandates

Nicholas J Price

In recent years, diversity on boards has been a hot topic in the marketplace. Much of the pressure has focused around gender diversity, in particular. The direction of the issue is starting to change. As board directors have caved in to the pressures of creating more diverse boards, they've seen why adding diversity is a good thing. Across the globe, many boards have added women to their boards, and have had good results.

The consensus among board directors is that there is vast agreement that diversity brings unique perspectives to the boardroom, enhances the board's performance and improves relationships with investors. Perhaps the only thing that's changing is how board directors and shareholders rank the importance of it.

Board Director Views Changing on the Importance of Diversity on Boards

The 2019 PwC Annual Directors' Survey gives us some clear hints about how board directors view the pressure and the growing talk about mandates that require diversity on boards.

In many ways, boards of directors have been left to their own devices to follow best practices for good governance. It was the prominent mistakes of large financial companies that signaled investors, lawmakers and regulators to become so vocal about board performance. The latest statistics from the Annual Directors' Survey seem to be saying that the directors got the message about the importance of diversity and they prefer to set their own priorities. The percentage of board directors who said gender diversity was very important on boards fell to 38%, which is the lowest level since 2014. With regard to racial and ethnic diversity, the percentage of directors who felt it was important dropped from 34% to 26%. The numbers were similar with respect to age diversity, where the percentage of board directors who thought it was very important dropped from 21% to 14%.

Board directors also opined that they felt investors were giving too much credence to the issue of diversity. About 63% of board directors said they felt investors devoted too much attention to gender diversity, which is up from 35% for last year. Around 58% of board directors also felt that investors put too much weight on racial and ethnic diversity, which is up from 33% last year.

Overall, boards are acknowledging that all types of diversity have an important place on the board; however, it's time to stop beating a dead horse. They get it, and it's time to move on to other equally important topics.

How Successful Has the Push for Diversity Been?

The Annual Directors' Survey provides an informative timeline for how effective the push for diversity has been:

  • March 2017. State Street Global Advisors launched their 'Fearless Girl' campaign, in which they announced they'd be voting against board directors at companies that failed to appoint any women directors.
  • September 2017. New York City Pension Fund's Boardroom Accountability Project 2.0 sought disclosure of skills, race and gender of board directors in a matrix format.
  • February 2018. BlackRock released revised proxy voting guidelines that recommend companies have at least two women on their boards.
  • October 2018. California requires public companies to have a minimum number of female board directors starting in 2019.
  • December 2018. 40% of the 2018 incoming independent directors were women, according to Spencer Stuart Board Index reports.
  • December 2018. Glass Lewis revised their policy and recommended investors vote against nominating committee chairs of boards without female directors starting in 2019. ISS followed suit for 2020.
  • July 2019. Every company in the S&P 500 has at least one woman board director.

Diversity Mandates Trending in the United States

California was the first state to break out of the pack with a gender diversity mandate that lists minimum numbers of female board directors starting in 2019. New Jersey now has a similar proposal in its legislature, which would require public companies with more than five board directors to appoint at least three women to the board by 2021.

The National Conference of State Legislatures reports that Illinois, Massachusetts, Colorado and Pennsylvania passed non-binding resolutions over the last several years to encourage companies to add diversity to their boards. Other states are considering similar legislation.

About 83% of board directors reject diversity mandates. Around 67% of board directors believe that boards will take the initiative and become more diverse without any pressure at all. In essence, boards are inclined to reject diversity mandates because they want to retain the flexibility to find their own balance between culture, collegiality and diversity.

Technology Is the Answer to Finding the Balance on Boards

Board directors may be right on the mark by asking for some leeway in forming what they view as the best board composition. Perhaps it's not mandates but having the proper digital tools that enables boards to create high-performing boards.

Diligent Corporation and NACD have joined forces in the United States with a new tool called Nom Gov. The tool breaks open a vast database of profiles for board directors and executives. It's the answer to empowering boards to embrace modern governance practices, complete with analytics, to support highly effective and diverse boards. The tool helps nominating and governance committees identify and recruit top talent while reducing reputational, governance and shareholder activism risks.

Diversity becomes a minor issue when Nom Gov gives boards access to all the necessary information they need to make good decisions about board qualifications and fit in real time. Nominating and governance committees can use the tool to enhance their succession planning efforts by perusing an extensive, global database of thousands of director and executive profiles using a granular search tool using just a few clicks.

Committees also have the advantage of being able to view their current board's skills and expertise and compare them to their peers within the industry in order to assess their combined strengths and weaknesses among their leadership. The tool helps boards improve the quality and efficiency of board discussions by providing up-to-date intelligence and profiles on companies of interest.

It's time to consider the possibility that corporate boards know best what they need in the boardroom to put forth their best performance. What the reports haven't shown to date is how technology can help investors and legislators get over the hump regarding the lack of trust in boards to form the types of boards they know will work best for their companies.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.