Wednesday, March 28, 2012
DIVERSITY AND THE BOARDROOM 2012
Forty-eight years after the passage of the Civil Rights Act of 1964, prohibiting racial and gender discrimination in American business, the picture of the boardroom in public firms remains remarkably monolithic. According to the Alliance for Board Diversity, three-quarters of all directors within the Fortune 500 are White men, even though people of color comprise 33 percent of US population and women comprise over 50 percent. The picture gets even grimmer when leadership positions are considered: White men constitute 94 percent of board chairs; 85 percent of lead directors; 79 percent of audit chairs; and, 83 percent of compensation committee chairs.
Given the increasing political power of public corporations in America and the economic stakes for our entire society in sound corporate governance this reality should be deeply disturbing to anyone who believes in a representative democracy where those holding the levers of power reflect our society generally or an egalitarian meritocracy where competitive mettle rules over entrenched power. The issue of the legitimacy of the process by which economic and political power is allocated through the public corporation is more crucial than ever, and is exponentially more important than in 2000, when I published Diversity and the Boardroom. Simply put, an "old boys club" dominates the apex of our economy, and due to Citizens United, our political system too. This is no meritocracy; this is crony capitalism. In 2004, I argued that the homosocial reproduction that dominates board selection process resulted from CEOs (and their friends) gaming the system to attain enhanced compensation through the exploitation of cultural affinity. Since 2004, progress has stalled and boards are getting less diverse.
Meanwhile, the empirical evidence in favor of board diversity as a means of achieving superior governance outcomes generally strengthened since 2004. Thus, "subprime lenders had boards that were busier, had less tenure, and were less diverse with respect to gender" than financial firms that avoided more risky subprime lending. Another recent study found that firms with more gender and ethnic diversity achieved superior reputation outcomes and superior innovation outcomes. While the evidence does not always find statistically significant gains from diversity in the boardroom, on balance the record is clear: board diversity pays. In particular, diversity is one means of addressing weak corporate governance. Firms that broadly embrace diversity (such as in senior management) also achieve superior outcomes.
One cause for some hope lies in recent SEC rulemaking which requires that firms disclose the role of diversity in director selection. On the other hand, given the DC Circuit's ruling in Business Roundtable v. SEC, and the SEC's subsequent determination to leave board selection up to current management, homosocial reproduction may persist far into the future. Notably, recent studies show that both of these events caused a loss of shareholder value in firms most likely to be affected.