Corporate Governance

The SEC and Diversity in the Boardroom: Another Benefit of Access (Part 5)

By J Robert Brown Jr.

We are discussing diversity in the boardroom and the speech given by Commissioner Aguilar on Sept. 16 at the SAIS Center for Transatlantic Relations (at Johns Hopkins), titled "Diversity in the Boardroom is Important and, Unfortunately, Still Rare." 

Commissioner Aguilar points out that there is a "bright spot" in the data on board diversity in the United States.  In the recent term, things have gotten better.

• The one bright spot among these low numbers is that, in 2009, women represented 39% of all new board appointments. The 39% figure represents 165 out of 424 board positions filed in 2009 and represents an increase from the 25% of new board seats filled by women in 2008.?

The hope is that the numbers reflect a trend rather than an aberration.  To make this a trend, pressure has to continue on the nomination process, encouraging boards to expand their outreach and criteria used in selecting appropriate candidates. 

At least some of the impetus for the trend toward greater diversity, and an opening of the candidate selection process, has come from regulatory reform.  SOX all but required boards to include persons with financial expertise on the board (it really mandated a comply or explain approach).  See Item 407 of Regulation S-K (disclosure requirements for financial expert on board of directors). 

Boards were effectively forced to expand the pool of directors to include more persons with financial expertise.  As it turns out, women are more likely to have served in positions with this type of experience than in CEO positions.  It is one illustration that the problem of diversity is not an absence of qualified candidates but a cramped set of criteria used for selecting nominees. 

Likewise, as we have discussed, the SEC's recently adopted disclosure requirements may provide nominating committees (and their consultants) with an incentive to search more deeply to find a diverse pool of candidates. 

But the main source of continued pressure for diversity will likely be access.  Access takes the nominating process away from the board and allows shareholders to pick their own candidates.  Shareholders have less incentive to pick directors that mirror the CEO in experience and demographic background.  As a result, they will likely nominate candidates with a more diverse perspective. 

But as always with access, the promise is not its actual use but the threat of use.  Thus, when a shareholder challenges a board of directors by nominating alternative candidates solely because of the lack of diversity on a board, other public companies will sit up and take notice.  The message will be clear that to avoid this type of access challenge, boards will need to do a better job diversifying its membership. 

We have noted that access, in the beginning, will bring about only modest change.  But in fact it is really a paradigm shift whereby shareholders have been given a substantive and meaningful method of raising objections to management.  Those objections will mostly be over the business strategy and approach taken by management.  But diversity on the board is part of that business strategy and approach.  If the board doesn't take the diversity seriously, shareholders now have a way of objecting.  And with access, they likely will.    

Full post as published by The Race to the Bottom on September 23, 2010 (boomark / email).