Board Diversity and the Need for Access (Part 1)

At the Rocky Mountain Securities Conference last Friday, Commissioner Walter gave a thoughtful speech that touched upon a number of corporate governance issues, including access.  She indicated support but also noted that it was better to be a bit slower and get it right than the other way around.  

There are many reasons why access is needed.  A critical one is the woefully poor job boards have done ensuring a diverse membership. 

As we have noted on this Blog before, boards in the US are not very diverse.  The number of women hover at around 15%; the number of people of color around 11%.  Moreover, board members often have similar backgrounds.  In other words, putting aside race and gender, they are likely not very diverse in their viewpoints.  The need for diversity is not merely to provide some type of social mosaic.  Diversity will provide management with alternative view points that will contribute to effectiveness.

Why are boards not diverse?  It is not from a lack of candidates.  Take women for example.  They are over half the population and make up 57% of all college students, a percentage that has been relatively consistent since 2000.  How are they doing in business?  According to the census:

More than $939 billion
Revenue for women-owned businesses in 2002. There were 116,985 women-owned firms with receipts of $1 million or more.

Nearly 6.5 million
The number of women-owned businesses in 2002. Women owned 28 percent of all nonfarm businesses.

More than 7.1 million
Number of people employed by women-owned businesses. There were 7,231 women-owned firms with 100 or more employees, generating $274 billion in gross receipts.

So why are boards lacking in diversity?  Because the nomination process is controlled by the board and the board simply self perpetuates.  All of the assorted reforms, including independent directors and independent nominating committees, have left these numbers essentially unchanged.

What is the solution?  There are two possible approaches.  One would resemble Norway, with legislation requiring a minimum number of women on the board.  The other is access.  We will discuss these approaches in the next post.