In my previous post, I discussed the first of the two main regulatory models designed to address diversity in the boardroom—quotas. In this post, I turn my attention to the United States’ experiment with diversity disclosure.
The statistics on gender representation at the highest levels of U.S. corporations paint a bleak picture. Women hold slightly less than 18 percent of Fortune 1,000 board seats. Since 2010, the Securities and Exchange Commission has required publicly traded firms to report on whether they consider “diversity” in identifying director nominees and, if so, how. But here is the catch: the agency refused to define “diversity” in its rule, leaving it to corporations to give the term meaning.
So what does “diversity” mean to corporate America? In my new book, Challenging Boardroom Homogeneity (Cambridge University Press, April 2015), I analyze the disclosures that the S&P 100 submitted to the SEC from 2010 to 2013 to shed empirical light on this question. My findings are striking and will not provide those concerned with equality with much reason for optimism.
Over the four years of my study, virtually all companies complied with the rule by disclosing that they do in fact consider diversity when appointing their boards. However, only approximately half defined diversity in terms of gender, race, or ethnicity. Most firms, when defining diversity without regulatory guidance, refer to a director’s prior experience, rather than his or her socio-demographic characteristics.
Take, for example, Ford Motor Company. Only two of its sixteen directors are women. From 2010 to 2013, the company provided the same disclosure: “Ford recognizes the value of diversity and we endeavor to have a diverse Board, with experience in business, government, education and technology, and in areas that are relevant to the Company's global activities.” Even perfunctory reporting can easily fulfill a firm’s legal obligations under the SEC rule. Berkshire Hathaway’s disclosures provide a case in point: “Berkshire does not have a policy regarding the consideration of diversity in identifying nominees for director. In identifying director nominees, the…Committee does not seek diversity, however defined.” Insolent? Perhaps. But perfectly permissible under the rule.
Last Fall, speaking at a conference in Washington, D.C., SEC Chair Mary Jo White acknowledged that an air of disappointment surrounds the corporate disclosures submitted under the rule thus far. Her proposed solution? Investors and other stakeholders must “make it known that…they want more information on what is being done to promote diversity” and firms must “work harder to identify qualified women to serve on boards.”
Chair White is undoubtedly correct. Investors and civil society groups must continue to press corporations to address diversity, and firms must expand their searches for board nominees. By placing the responsibility on the shoulders of these parties, however, she glosses over the SEC’s role in the disappointing performance of the rule.
Many commentators who supported the SEC’s original rule proposal made it clear that they were concerned with “diversity” along gender and racial lines. But the Commission ultimately left it to firms to construe the term as they wished. If corporate America’s disclosures are disappointing, then the design of the rule is to blame.
A rule that provides this much flexibility gives corporations no incentive to pursue socio-demographic diversity. In fact, it may make the situation worse. How? In reporting under the rule, companies have demonstrated that they do take some form of diversity into account. This puts them in a state of legal compliance, which may give them a sort of “moral cover.” Having played by the rules and checked the appropriate boxes, corporations have little incentive to go a step further and pursue socio-demographic diversity. Indeed, my study shows that there has been very little change in the content of firms’ disclosures. For the vast majority, the disclosures contained the same information year after year.
In her remarks, Chair White laid out her own personal conception of boardroom diversity: “when I speak of boardroom diversity, I mean more than just diversity of professional experience, industry expertise and education. I mean real gender and minority diversity, which brings with it a richness and variety of experiences and perspectives.”
Chair White has a point. Various studies, including my own, suggest that gender diversity – for a complex set of reasons – may have a positive effect on boardroom decision-making and overall firm governance. What is more, the corporation is a place of significant power in today’s world. Many companies have nearly as much influence over economic and social relations as government, and women and members of racial and ethnic minority groups ought to be a part of their leadership structures.
In my book, I argue that the SEC should abandon its agnosticism and define diversity as including factors such as gender, race, and ethnicity, thus requiring corporations to consider the socio-demographic composition of their boards. The Commission should also consider adopting a so-called ‘comply-or-explain’ approach to diversity disclosure. Requiring companies to either comply with a rule that they consider socio-demographic diversity in composing their boards (and follow other prescribed diversity-related practices) or explain their decision not to do so would nudge corporations with a bit more force than the pure disclosure model currently in effect. This approach, if adopted, should be coupled with targeted reviews of issuers’ filings.
If well designed, a disclosure regime can yield important benefits. But it may be ineffective if it gives the regulated entity too much discretion. If we are to move toward more inclusive corporate boardrooms, the SEC must rethink its rule and the current proxy season is an opportune time.
The “What’s The Return On Equality?” Mini-Symposium: