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.
It is an 'old boys club,' and that much more difficult for minorities to get involved. It is sad to say that the boards with the "broadest diversity" still do not reflect proportionally to the U.S. population. For instance, with Citigroup and Wells Fargo being the most diverse because they have 4 and 3 seats, respectively, of their 17-member board as non-whites (and thus, much less than the 33% minority population), board room diversity still has a long way to go.
ReplyDeleteAlthough the culture of the 'old boys' exists, minority groups are less likely to be involved in shareholder decisions. With much of their wealth not tied up in the stock market--unlike whites--minorities lack any sort of voting power. And considering the deception and perpetual fraud that the financial sector extolled on minorities leading up to the financial crisis, why would minorities want to fund the capital expansion of these same companies?
-MNissim-Sabat
I truly believe that "keeping the main thing the main thing" is crucial here. We don't pursue diversity in the boardroom for diversity's sake; we seek it out because it's what is best for the business. Having adequate minority representation on boards ensures that companies are getting the best of the best to effectively run their organizations. For this reason, I think that striking a balance between rewarding merit and requiring quotas. Quotas alone won't solve the problem, but requiring boards to abide by them might at least encourage a proactive attitude. While I'm sure many boards are actively fighting to preserve the "old boys club" model, I think most are simply unmotivated to resolve the problems relating to boardroom diversity. A quota would at least provide incentive. -C. Gevas
ReplyDeleteThe SEC rulemaking is a move in the right direction. An actual law or rule put down in place to promote and achieve diversity among boards would go a long way. With companies wanting the same CEOs to operate their business due to repuation, it leaves little room for more diverse and different people to be implemented into a chair or executive position at a more frequent rate. This rulemaking could hopefully have the effect similar to the Rooney Rule in the NFL where teams are required to interview African Americans for the head coaching position. With more awareness and an open view into whether a firm's selection process is fair or equal, diversity selection for directors could become more prominent in years to come.
ReplyDelete- Jordan K
Diversity on boards as well as many other highly regarded positions is an interesting topic. One can look back at the post from a few days earlier discussing how many chairs/CEOs sit on multiple boards. If one believes, which I do that the overlap leads to boards/corps not having proper management, by disallowing the number of boards a person can sit on, would help be one way to improve getting quality minorities/women on to boards. Having a "status quo" of the old boys club run most of the corps. in the country/world is an issue that needs addressed. People from a similar background will look at situations with a similar mindset, by getting new members a board could come up with creative ways to ensure it is meeting its duties to the shareholders. Like Jordan said, the NFL has been proactive, like the new SEC rule which has helped, not completely alleviated the situation, due to exceptions.
ReplyDelete- Justin Williams
Generally (and most simply), I agree that there is a dire need for more diversity in the boardroom. However, my comment is more narrow. Corporate boards need to be filled with more women, and the fact that women do not demand such a change is alarming. Corporations are some of the greatest contributor's to non-profits and various community organizations. Obviously, a corporation run by an "old boys club" is less likely to see the importance of organizations that specialize in women's care or are related to women's issues or interests. In a time where corporations have personal identities and can give political donations, this inequity in the gender of board members becomes more imperative.
ReplyDeleteI can say I agree with most of what is being said. I think it is worth considering too, that the larger picture for corporations and boards (as well as our political institutions) is that diversity will reap major benefits. This is true for a couple of reasons. There are obvious PR benefits to having diversity on boards that will appeal to the public. However, I don't think this is the biggest benefit because consumers at their core are more price driven.
ReplyDeleteThe biggest benefit will be the type of talent that a company with a racial and gender diverse board would attract. Workers, especially the college educated, want to work for a company that accepts them as they are. If a company opens the boardroom doors it will find that there are lot very talented people that would jump at the opportunity to work there. I think you have to look at the Silicon Valley and tech companies to see how talent will flock to companies that try to be different and accepting.
Noah A. Barnes
I think the study that found that diversity leads to superior outcomes is significant. Now that we are operating in a world economy, being able to be diverse is greatly important. By having a diverse board, that is not only diverse by race or gender, but also culturally diverse, the company will have a better understand of various cultures and connect with them correspondingly. Better connections will likely lead to better performance within that culture. Alan Mulally, CEO of Ford, had said that he desires Ford to become more diverse, because the closer you get to potential customers emotional and intellectual roots, the better able you are to communicate with them and there is a better chance for success. I think Mr. Mulally is exactly right, by having someone who is culturally diverse on the Board of Directors; it will lead to a better understanding of that culture. This will result in better performance within that segment.
ReplyDeleteGavin Ward
I must second Mr. Ward on this with one or two caveats. Diversifying must be sold as the new business model for companies looking to expand internationally. Traveling internationally only a few times, I would be scared to start a new business in a foreign country without extensive research of its culture. Expanding that to the global scene, I am surprised many companies who operate billion dollar enterprises do not have a widely diverse group of directors that can tap into the vast ideas and experiences well beyond an American mindset. But without being personally involved in the corporate environment, I suspect that companies already do this- they just segregate the "idea makers" to a lower department. I do agree with Mr. Ward that better understanding a countries culture will help a business grow, but must the board have personal knowledge for this to work or can a nondiverse board just be open and attentive to a report issued by one of their diverse R+D departments? If a report will motivate a nondiverse board to respond favorably to changes in the market, what will motivate the company to have a more diverse board?
DeleteI agree with Gavin, and I also agree with previous comments that diversity should be valued and pursued because it betters a business by strengthening that business's relationship with its customers and the suppliers. Stronger, healthier relationships lead to better profits and long-term success. Ultimately, shouldn't a business's goal be long-term success (i.e., reliable profits for the long term)? Diversity will go a long way toward helping a company be flexible and establish and maintain the necessary relationships.
ReplyDeleteI agree with the other posts that diversity on boards is extremely important. But when we are talking about diversity, does it extend beyond gender and race? Many of the members of corporate boards have followed the same paths and have similar backgrounds. These individuals sit on multiple corporate boards. They have many of the same ideas. Does this perpetuate groupthink in the boardroom? I tend to think that people of the same background, making decisions for multiple corporations may not actually be in the best interests of those corporations. It doesn't really permit for new, fresh ideas to prosper. Rather, I worry that board members troll from one board meeting to the next, not contributing new ideas or standing out from the consensus of the group. So my suggestion is that perhaps diversity should extend beyond just gender and race, but should also include individuals of different backgrounds.
ReplyDeleteKatie Dean
I agree with Katie. Corporate board members tend to be people who have followed the same paths and have similar backgrounds. However, I disagree with some of my classmates on the notion that corporate board membership should be the sole decision of the shareholders. Bad business decisions by the board lowers the value of the corporation and ultimately affects the financial system. This was seen during the economic crisis of 2009 when poor corporate decisions lead to cascading failures in the real estate markets, which in turn caused the financial crises.
ReplyDeleteSince these financial institutions are too big to fail, it is in the best interest of the public to ensure their board members are capable. This is why I believe diversity is important in the boardroom. Diversity brings about better business decisions. Therefore, corporations should have board members that can contribute new ideas and think outside the box to identify the potential risks.
Diversity inhibits groupthink and facilitates healthy debates re what is actually the ‘best’ solution to a given problem; however, the “diversity for diversity’s sake” argument is weak for at least two reasons:
ReplyDelete-Diversity, by definition, is unlimited. It’s disingenuous to use the term “diversity” but limit its scope to racial/ gender diversity; the more appropriate term in that context is “proportionality.” By limiting the scope of diversity to gender/ethnicity, the underlying assumption is “oh, you’re [insert ethnicity/ gender here], so you must see things differently than I do.” Striving for proportionality only perpetuates the idea that individuals should be classified. The focus should be on the individual’s actual beliefs, not on the preconception that their race/gender somehow guarantees the type of diversity that facilitates sound corporate decision-making.
-Diversity is subjective. To illustrate this point, let’s assume a given corporate board perfectly mirrors a given set of racial/gender demographics. It’s true that the board would be diverse, i.e. proportionate in terms of race and gender, but what if all of that board’s members have the same political ideologies, economic philosophies, religious views, sexual orientation, etc.? Is it still diverse, or is it just proportionate? What if the board’s members were all the same race and gender, but had a range of political/economic/religious/sexual orientations? Which would then be the more diverse board and thus more likely to achieve a superior outcome?
Diversity in the board room is increasingly important in the ever-changing global market. As the Wisconsin article mentioned above indicates, diversity in the boardroom is helping companies to increase profits. As Ms. Gevas stated above, no matter how the public feels about diversity, profit is forefront in the minds of a corporation and its shareholders. I believe that when a corporation has a diverse board, they will be able to reach people (potential consumers) who had previously been ignored, as well as be able to learn different approaches to connect with others who fall outside of the “old boys club”.
ReplyDeleteThe corporation will also get several different, new and “diverse” ideas which had been previously ignored. I liked the idea in class concerning not only having a racially and gender diverse board, but also having an economic class diverse board. I believe that if CEO’s were able to hear from the laborers or manufacturers who are lower in the company some of their views on corporate and profit management might transform. The people that will be buying the corporations product are not likely to be from “the old boys club,” and the viewpoints of others will be a great asset to the corporation. The board may also be able to get viewpoints from people actually working with the public or who are manufacturing the product. These viewpoints could include various cost-effective ideas from individuals who actually have hands on experience working within the lower realms of the corporation. Again, corporations exist to make profit and including all of these different people on the board is sure to generate revenue, as well as, make the corporation more appealing to not only the consumers but possible investors as well.
Diversity for diversity's sake won't fix the board room. Like Katie and Benson said, one of the bigger problems that needs to be addressed is the homogeneity of the board room. While it has been shown that diverse boards are doing better than non-diverse boards, I think there's a real issue of quotas springing up in the board room. Is a minority female that went to all the same schools and followed virtually the same climb up the corporate latter really diverse? I would argue not. The great push for corporate diversity really doesn't seem to be making a difference. To make this diffence, boards need to seek out true diversity. Once this happens, I think great changes could be made.
ReplyDelete-S. Lackey
While I agree that having a diverse board is generally a good thing, I wonder if there could be problems with a mandated diverse board. If a quota system were put into place, could that cause a rift between the diverse party and the rest of the board? It would be extremely counterproductive if the board of directors viewed the diverse party as meeting a quota. They may view them as less qualified and taking the slot of a more qualified person who could be there instead. While it would not be right, board members may view a quota system as hindrance on their competence as a whole.
ReplyDeleteAnother potential problem I can see from a mandated diversity policy is the "diversity for the sake of diversity" concept. Shouldn't the elements for being selected to a board be your personal skill and previous accomplishments? These have nothing to do with the diversity you bring. Also, do we want to continue to put people in these separate boxes? Do went want to think of certain board members as filling the black board member position, the Hispanic board member position, the female board member position, etc. This seems to somewhat go against the notion that you should be judged by your merits and not race or gender.
Business operates within its own culture and doesn’t like too much regulation from the government. A lot of the continual mindset of the “good old boys club,” is generational. It is human nature to want to surround yourself with people who look and feel the way you do. However the corporate climate is centered on competition. With the increasing focus on the global economy, the transition will have an effect on our businesses and the way they operate. Businesses who do not adapt will become irrelevant. The statistics in the above case are evident that this is already starting to occur. Soon, corporations will realize that they have to accept and embrace diversity or get left behind. This will occur with or without government interference; however, it may be in the best interest of our nation’s economy if this occurs sooner rather than later.
ReplyDeleteWhen I was in undergrad I invited a friend to a party with me. She took one step inside the house and then stepped back out. I asked her what was wrong, and she said "everyone's black. I'll be the only white girl."
ReplyDeleteWelcome to my life, I thought.
In a journalism class once, a student became very offended with her assigned reading because the author, who was black, consistently introduced non-black characters by reference to their race, such as as a white woman named Amy or a white man named Jim, etc.
I point out these situations to bring up this issue: sometimes when you're used to being in the majority, you may lose sight of what it must be like to always be in the minority. My classmate in journalism class, for example, had never mentioned that other readings by non-Black authors introduced characters as a black man named Tim, or an Asian lady named Sue. Though I could be wrong, I thought she reacted so strongly to the reading because she was used to reading books by white Authors who mentioned the race of all their non-White characters. But when she read a book by a black Author, she wasn't necessarily used to reading about how "White" the characters were. Despite all our efforts to be colorblind, I think it's still a part of human nature to see ourselves as different.
I can understand the feelings of those who are uncomfortable with diversity for the sake of diversity. Especially in business, we want the best people for the job, hands down. I wonder, however, if those who feel this way are often in a situation where they are in fact the "token" minority/sex in the room. I absolutely do not speak for all minorities, here. But for myself, I'm well aware that I'm often the only minority in the room. Sometimes, the only minority of a mixed racial background. After 31 years I'm pretty comfortable with that. But I wonder how others, who are normally in the majority, would feel if they were suddenly thrust in the same classroom, 5 days a week, with a majority of Native Americans, or Koreans, or South Americans. If you're the only person of your race or your sex or your religion in the room, would it change your feeling at all about whether you'd like the room to be more diverse just for diversity's sake?