One of the primary functions of a board of directors is to enhance shareholder value. Advocates argue and studies show that companies with greater board diversity outperform those companies with less diversity. This is one of the reasons that board composition (and, in particular, gender, race and ethnic diversity) is a topic of increasing focus among corporate governance groups, investors, and regulators in both the U.S. and Europe.
In 2016, Mary Jo White, then-Chair of the SEC, in her keynote address to an international corporate governance conference, cited research showing that “boards with diverse members function better and are correlated with better company performance” and stated that “major efforts are underway in the United States and elsewhere to improve board diversity.”
Also in 2016, Business Roundtable, an association of chief executive officers of leading U.S. companies, published Principles of Corporate Governance, which included that diverse corporate boards “strengthen board performance and promote the creation of long-term shareholder value” and that board composition “should reflect a diversity of thought, backgrounds, skills, experiences and expertise and a range of tenures.”
In early 2017, State Street Global Advisors, one of the world’s largest asset managers, published guidance on enhancing gender diversity on corporate boards. The guidance referred to gender diversity as “one of many ways a board can introduce a varied set of skills and expertise among its directors to help improve financial performance” and expressed a belief that “boards should have at least some independent female directors.”
And in late 2017, Institutional Shareholder Services ISS released the results of its 2017-2018 Global Policy Survey, in which more than two-thirds of the investor respondents indicated that a public company board without any female directors would be considered problematic.
Regulatory frameworks Two of the main approaches taken by governments to promoting board diversity are (1) quotas and (2) disclosure. A number of countries in continental Europe follow the first approach with legislated board quotas. For example, France, Spain, Norway and Iceland generally require public companies to have at least 40 percent female board representation. Similar quotas exist in Italy (one-third), Germany (30 percent), the Netherlands (30 percent, nonbinding) and other countries. The specific requirements vary by country and, in some cases, also apply to private companies, state-owned enterprises and/or large companies only.
By comparison, the United Kingdom and the United States follow the second approach, requiring companies to disclose certain information and allowing investors to evaluate the disclosure and underlying policies. In the U.K., the Corporate Governance Code (the “Code”) calls for all companies with a Premium Listing of equity shares on the London Stock Exchange’s Main Market to consider diversity (including gender) in the board appointment process and to describe in their annual reports the board’s policy on diversity, any measurable objectives set for implementing the policy and progress on achieving the objectives. Noting that good governance may be achieved by other means as determined by the board, the Code allows companies to comply with the Code provisions or to explain specific noncompliance to shareholders (i.e., “comply or explain”).
In the U.S., SEC rules (specifically, Item 407(c)(2)(vi) of Regulation S-K) require public companies to describe the nominating committee’s process for identifying and evaluating director nominees (including whether and how diversity is considered) and whether the company has a diversity policy for identifying nominees (including how the policy is implemented and how the effectiveness of the policy is assessed). In early 2017, the SEC’s Advisory Committee on Small and Emerging Companies concluded that the SEC’s existing rule “failed to generate information useful to stockholders, employees and customers in assessing board diversity” and recommended an amendment that would require companies to describe, in addition to their diversity policies (if any), the extent to which their boards are diverse, including with respect to race, gender and ethnicity of the nominees.
Recommendations The current focus on board diversity is likely to continue. It is clear that board diversity is being actively considered and encouraged by regulators, corporate governance groups and investors. As a starting point, companies should review the applicable diversity-related obligations in their jurisdictions. Additionally, companies should assess their current board composition, director search and nomination process, board refreshment practices and diversity policies. Business Roundtable specifically recommends that “boards of directors should develop a framework for identifying appropriately diverse candidates, which asks the nominating or governance committee to consider women and/or minority candidates for each open board seat.” Finally, with board diversity, as with other matters, companies should prioritize good disclosure and transparency with investors.
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