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Diversity on Boards
of Directors - Altering
the composition of their
boards of directors to
better reflect the
gender and racial
diversity.
Companies of all sizes
and sectors are altering
the composition of their
boards of directors to
better reflect the
gender and racial
diversity of their
customers, employees,
and other stakeholders.
These companies are
seeking increased board
diversity, in part, in
response to
institutional and
activist investors,
public interest groups,
and other stakeholder
organizations that have
launched widely
publicized campaigns
advocating increased
representation by women
and minorities on
corporate boards.
In addition, companies
are recognizing that
more diverse
representation on their
boards of directors is a
critical strategy both
in managing corporate
reputation and in
achieving financial
success in the face of
changing demographics
and the rapid
globalization of
business.
Although women and
minorities continue to
account for only a small
percentage of the total
number of corporate
directors (in the United
States, approximately 11
and 7 percent of Fortune
500 companies,
respectively), their
representation on
corporate boards has
been increasing slowly
over the last 15 years.
As part of an overall
commitment to diversity,
many companies are now
explicitly working to
recruit women and
minorities for their
boards of directors.
These companies are both
expanding the pool from
which they recruit board
members, as well as
utilizing a growing
number of resources
aimed at aiding
companies in placing
diverse members on their
boards.
In addition to placing a
greater emphasis on the
representation of women
and minorities on their
boards, companies are
increasingly looking at
board diversity more
broadly in terms of the
unique skills, expertise,
and perspectives of
their directors. This
new focus on board
composition stems from
an overall trend in the
field of corporate
governance that
emphasizes strong,
active boards with a
majority of independent
directors. In response
to these changing
expectations, companies
are looking beyond
traditional recruitment
sources in an effort to
find directors who bring
a greater variety of
knowledge, experiences,
backgrounds, and work
styles.
Business Importance
of Diversity
The business and
investment communities
have long debated the
legitimacy of the
connection between
corporate governance
practices and financial
performance. Nonetheless,
it has become
increasingly accepted
that the corporate
objective of maximizing
shareholder value
requires not only
superior competitive
performance, but also
attention to a variety
of governance issues,
including board
diversity. Below are
some of the key reasons
companies are working to
diversify their boards
of directors:
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Enhanced
Financial
Performance:
A 1998 study by
academics Amy J.
Hillman (Michigan
State University),
Ira C. Harris (University
of Notre Dame),
Albert A.
Cannella Jr.
(Texas A&M
University), and
Larry Bellinger
(Michigan State)
found that
“ethnic and
gender diversity
on corporate
boards is
associated with
superior stock
performance.”
The study
compared S&P 500
companies with
differing
numbers of women
and minority
directors and
concluded that
companies with
more diversity
had better stock
returns and less
risk of loss for
shareholders.
The study found
that companies
with the most
women and
minority
directors had
shareholder
returns 21
percent higher
than companies
with none. In
asserting that
board diversity
is a cause -
rather than an
effect - of
improved
financial
performance, the
researchers cite
preliminary
findings showing
that: (1)
increased
representation
of women and
minorities on a
board in one
year is followed
by improved
stock
performance the
next year, and
(2) there is no
evidence to
suggest that
better-performing
companies are
more inclined
than others to
add women and
minorities to
their boards.
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Changing
Customer Base:
Companies
wishing to
remain
competitive in
the global
economy will
benefit from
reflecting the
diverse
experiences and
perspectives of
a changing
customer base.
Given these
demographics, it
is important
that boards of
directors -
which are
increasingly
being called
upon to provide
strategic
direction and
long-term vision
- reflect this
diversity.
Together, women
and minorities
contribute more
than $1.5
trillion
annually to the
U.S. economy,
and studies
estimate that
women make up to
70 percent of
the consumer
decisions in the
United States. A
1996 survey by
Chief Executive
magazine found
that the
majority of
companies
seeking
diversity on
their boards
listed the need
for a “broader
perspective” as
the key reason,
and 21 percent
said the change
in board
composition was
to better
reflect their
consumer base. A
1995 survey
conducted by
Catalyst, a
nonprofit
research and
advocacy
organization
focusing on
women in the
workplace, found
that 85 percent
of the 325
Fortune 500/Service
500 CEOs
surveyed said
that they
considered it
“important” to
have female
directors based
on bottom-line
business
considerations.
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Improved
Employee Morale:
Diverse
board membership
sends a clear
signal to
employees
throughout the
organization
that a company
is committed to
the advancement
of women and
minorities at
the highest
levels of the
organization.
Evidence
suggests that
having diverse
role models on
the board of
directors can
also help
motivate
employees by
providing a
concrete example
of the company’s
support of women
and minorities.
A 1997 Catalyst
study found a
direct
correlation
between the
number of female
board members
and the number
of women in top-ranked
jobs, noting
that companies
with three or
more women on
their boards
were four times
more likely to
have women in
high-level jobs.
Another Catalyst
study, conducted
in 1995, found
that among the
top reasons CEOs
cited for
considering it
“important” to
have female
board members
were: (1) half
the workforce is
female, half of
college
graduates are
female, and
women make up
nearly half of
MBA graduates;
(2) the presence
of female
directors sends
a positive
message to
shareholders,
investors,
employees, and
the public; and
(3) the presence
of female
directors raises
female employee
morale.
Companies are
realizing a
variety of
benefits from
demonstrating an
overall
commitment to
diversity at all
levels of the
organization (see
Workforce
Diversity Topic
Overview).
Anecdotal
evidence
suggests that a
demonstrated
commitment to
diversity is
likely to
improve the
attraction and
retention of
female and
minority workers,
employee
productivity,
and employee
morale (as well
as increase
customer loyalty).
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Increased
Attractiveness to
Investors: Investors
are increasingly using a
variety of nonfinancial
measurements, including
board diversity, as
criteria in making
investment decisions.
Socially responsible
investors routinely use
the representation of
women and minorities on
a company’s board of
directors as a screen
for potential
investments.
Strengthen Relationships
with Stakeholders and
Enhance Corporate
Reputation: Growing
media and stakeholder
attention on the issue
of board diversity has
made it increasingly
important and cost
effective for companies
to proactively address
the composition of their
boards with regards to
racial and gender
diversity. Benefits to
companies undertaking
such action include: (1)
enhanced corporate
reputation among
shareholders, customers,
employees, communities
and others, (2) reduced
exposure to adverse
publicity stemming from
high-profile public
campaigns, and (3)
reduced costs associated
with the inclusion of
shareholder resolutions
related to board
diversity in annual
proxy statements.
(return to Advocacy &
Corporate Governance
Committee)
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