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US Board Diversity: Slow-Moving Change

As a long-time Bob Dylan fan, I have suffered the ups and downs of his career.  Well, not really “suffered” but empathized may be a better way to express my commitment.  We all remember the days when Dylan embraced Christianity and recorded some great music with Dire Straits.  Slow Train Coming was a great song (listen here).

Now, to bring this analogy to corporate board performance, I want to offer some observations.  One of the more frustrating aspects of ethics and compliance is the slow pace at which corporate boards have embraced and moved on the value of ethics and compliance programs.  All too often I hear positive statements by compliance officers who “believe” their board “gets it,” or point to singular actions of no significance as evidence of board commitment.  I get it – it is hard to admit it but most boards fall well short in dedicating themselves to ethics and compliance.

I have a significant list of concerns – boards do not understand how to oversee and monitor a compliance program; boards spend little time to advance an ethical culture, improve their own performance, and ensure that the company does not veer off into potential risky adventures.

One continuing area of concern, which stands in contrast to global board performance, is that US boards continue to fall short in advancing diverse board membership.  In a recent article, the Wall Street Journal noted that there are no longer any companies in the S&P 500 with all-male membership.  Talk about an “accomplishment” that underscores a continuing problem.

Seven years ago, in 2012, one in eight boards were all male.  As of 2019, 27 percent of board seats are held by women.  That is not something to be proud of – that is something that needs to be addressed, and done so quickly. In California, for example, of the 94 public companies with all-male boards in late 2018, 60 percent have added at least one woman to their boards since California passed a law requiring at least one female board member by the end of 2019.  The California law mandates a minimum of at least two women board members by December 31, 2021.  New Jersey and Illinois are considering similar legislation to mandate gender diversity.

Perhaps most important, companies should be introducing change without states having to pass laws and intervene.  Gender and racial diversity is a social mandate in today’s world.  So long as corporate boards operate without gender and racial parity, corporate leadership will lack credibility and influence.

To return to Bob Dylan, we all know that times are changing and social expectations of employee workforces and society in general are demanding gender and racial parity.  (Listen to Dylan’s Times They Are a Changin Here).

The research surrounding board diversity and financial performance is mixed.  However, there is no question that board diversity is linked to more corporate social responsibility and ethical behavior.  Investors are showing more interest in these issues as well.

Research has shown that a broader range of perspectives from diverse groups can improve board decision making.  Diverse boards are more likely to reflect a company’s employee and customer base and improve identification and consideration of relevant issues.

Given rising employee and community expectations, companies can expect to hear more criticism on this issue.  As millennials take over and increase their presence in the workforce, it is fair to expect that their expectations on this issue will grow.  By 2020, millennials are expected to reach 50 percent of the workforce – that is an issue that will have significant implications for corporate governance and performance. 

To address these issues, corporate boards have to improve their recruiting and nominations process to focus on diversity in recruiting new board members.  Candidates have to be sought from new sources, not just word of mouth or social groups connected to existing board members’ professional or social networks.  Finally, boards have to reexamine turnover rates and consider term limits or age limitations to increase new board members.

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