Corporate Governance

Gender Diversity on the Board: The US Falls Further Behind (And Why We Need Shareholder Access) (Part 1)

By J Robert Brown Jr.

In crafting a system of regulation, there is no question that the preference should be in favor of allowing markets to effectively function.  In general, markets make better decisions than regulators.  But that is not always true and sometimes the existence of market failure is easy to see.

What could possibly explain the dearth of women inside the corporate board room for US companies?  The numbers are stark.  Despite the fact that women consist of 52% of the population and are the recipients of most college degrees, they have managed to gain only about 14% of the positions inside the board room. 

Given the average size of US boards, this amounts to one per board room.  In other words, companies include a single woman on the board to avoid the embarrassment of having none (although apparently about 30% of US companies don't mind this embarrassment) but otherwise do not view an increased voice for women in the board room as a priority. 

No one, of course, says that its because men are more qualified or women cannot do the work.  They explain these low number, forlornly, by pointing out that the pool of qualified women is small and, as a result, they have no choice but to fill openings with men. 

Given that women are such a big percentage of the population, the excessively small pool argument can only be made with a straight face if the pool is defined in a way that limits candidates to areas that are dominated by men.  Thus, for example, if directors were limited to professional football players or engineers, the argument about limited number of eligible women might have some merit.  

The professional football player equivalent category for directors is the pool of CEOs and top level executive officers.  Because companies want boards with high level executive experience, an area dominated by men, they have few women to select and put on the board.  Things will only change when more women make it to the executive board room. 

But the explanation seems more like an excuse. It ignores the fact that there are categories of people with experience and expertise that can be very valuable to a board.  SOX put an emphasis on the need for financial expertise on the board, both by increasing the oversight authority of the audit committee and requiring disclosure of directors who meet the definition of financial expert.  Moreover, the need is even more important as CFOs disappear from the board.  One study of the 100 largest US companies found only seven instances of the CFO sitting on the board. 

The need for financial expertise requires directors who likely served in positions other than CEO.  It provides an additional avenue for expanding the pool of eligible women.  But finance is not the only skill needed for the board.  Banking, law, politics, and academia can provide interesting areas of expertise.  Diversity of views that might, for example, result in Exxon putting an environmentalist on the board, also would provide increased avenues for women.  A larger pool means that in fact there are plenty of women who could join a board.  So, in fact, the dearth of women is not because there is a dearth of candidates. 

What is really the explanation? 

Full post as published by The Race to the Bottom on March 04, 2011 (boomark / email).