Board Diversity: Time’s Up on Good Intentions

By Julie Gorte, Ph.D., Senior VP, Impax AM and Pax World Funds

When I began working to make boards more gender diverse in 2001, the percentage of women on the boards of large companies in the United States was around 12 percent.[1] By 2011, women had gained a few more seats at the table,[2] and by 2016 women held 21 percent of board seats at Fortune 500 companies.[3] At this rate of progress — less than one percent increase per year — it will be three more decades before big companies’ boards achieve gender parity. And that, sadly, is the good news.

At smaller companies it will take even longer to reach board gender parity at the current rate of progress. In 2016, the average board of a Russell 2000 company had 12 percent women, compared with 20 percent in the S&P 500, and more than one-third of the companies in the Russell 2000 had all-male boards.[4] For minorities, the percentages are even narrower at both large and small companies.

We have known for many years that diverse groups do a better job with decision-making than homogeneous ones.[5] Moreover, there is a great deal of research showing that having more women in decision-making positions is correlated with better financial performance, and often with better risk management and lower risk of insolvency.[6]

Despite all these findings, the pace of change could be described as glacial, even when “glacial” meant the rate of progress of glaciers before climate change speeded them up. I’ve attended scores of conferences on diversity and heard many CEOs and other senior executives speak compellingly about the benefits of diversity and their own personal commitments to improving it — and then say “but of course, that will happen. We don’t need regulation.”

That was also the thrust of an October 2018 article in the New York Times, “Diversify the Boardroom, Just Not Like California.”[7] The main message: There are better ways to make progress than passing a law, as California did last year, mandating that boards include specified numbers of women by specified dates.

I’m sympathetic, up to a point. It’s almost always preferable to rely on market mechanisms to bring about change, compared with the sometimes clumsy and heavy hand of regulation. Look at what’s happened to coal, the most carbon-intensive fossil fuel, as a result of concerns about its impact on air pollution and climate change: The U.S., which once relied on coal for more than half its electricity use, has been retiring coal capacity at record rates and not building any new coal plants. Now coal creates less than one-third of our electricity, and it’s still dropping. Almost none of that happened as a result of regulation; as Michael Bloomberg famously said, “Obama didn’t kill coal. The market did.”[8]

Clearly, when business leaders want to make something happen, they often can. The fact that board diversity is happening at sloth speed in the United States — which, unlike several other countries, has not mandated it — says that our leaders don’t seem to see it as enough of a priority to make it happen faster. What do you do when something that should happen doesn’t? Mandate it.

Yes, mandates have drawbacks. Those who dislike board diversity mandates often point to a study of what happened when Norway mandated that boards be at least 40 percent women in 2006, which showed that, for awhile after the mandate took effect, performance suffered as board composition changed. Could that happen with the California law? Perhaps, but the California law does give companies several years to achieve acceptable diversity. Moreover, that one study doesn’t “prove” that board diversity mandates harm financial performance, particularly in light of the fact that it’s not just about Norway anymore. If that harm were an expected consequence of a mandate, we’d expect to see underperformance in all the countries that have such laws, which now includes Belgium, Italy, France, Germany and India.

Several other countries have comply-or-explain statutes that require companies to have certain levels of diversity or explain why they don’t. That includes countries like Australia and Great Britain. In short, if mandating board diversity were reliably penalizing financial performance, we would not expect to see studies like MSCI’s 2016 report showing that companies around the world (not just Norway) with three or more women on corporate boards enjoyed a higher return on equity of 10.1 percent per year, compared with 7.4 percent for companies that didn’t.[9]

Another objection to such a law is that the mandate could violate the civil rights of men because it requires women to be promoted and others to be disqualified on the basis of gender.[10] In my opinion, that is nonsense; nothing in such laws says that existing male board members must be replaced. There is natural board turnover, for one thing, and boards can also be enlarged by one or two in order to accommodate the laws.

The New York Times article and other writings on board diversity, urge us to rely on investors to send the signal to companies, noting that BlackRock and other investors are already working on that. News flash: Investors have been working on sending that message for years — in our case, decades. CalPERS and CalSTRS launched their Diverse Director DataSource, a tool for recruiting diverse directors, in 2011 — and that wasn’t the first time that a pension plan tried to move that particular needle. The treasurer of the Connecticut state pension plan has been working to make boards more diverse since the early 2000s.

We at Pax World Funds have been voting against all-male boards for more than two decades and writing letters to each and every company where we do this telling them why.

There was a superb article on Corporate Counsel’s website earlier this year that talked about racial diversity at law firms, noting, “We split atoms, we have placed men on the moon, we travel at the speed of sound, yet we cannot figure out the ultra-complex issue of law firm diversity.”[11] That’s exactly the right way to frame it: If we really care about this, we should be able to make it happen. It’s not rocket surgery.

This is why we have mandates. Reasonable people get tired of waiting for appropriate, well-supported things to happen. If you don’t want mandates, then gender diversity has to be more than a talking point: We need companies to set aspirational targets, make the appropriate people accountable for meeting them, and report on progress publicly. That is what makes things happen.


Article by Julie Gorte, Ph.D., Senior Vice President for Sustainable Investing, at Impax Asset Management LLC and Pax World Funds. She oversees environmental, social and governance-related research on prospective and current investments as well as the firm’s shareholder engagement and public policy advocacy. Julie is also a member of the Impax Gender Analytics team.

Julie serves on the boards of the Endangered Species Coalition, E4theFuture, Clean Production Action, Great Bay Stewards and is the board chair of the Sustainable Investments Institute. She also serves on the Investment Committee of the United Nations Environment Programme Finance Initiative.

Prior to joining Pax, Julie served as Vice President and Chief Social Investment Strategist at Calvert. Her experience before she joined the investment world in 1999 includes nearly 14 years as Senior Associate and Project Director at the Congressional Office of Technology Assessment, Vice President for Economic and Environmental Research at The Wilderness Society, Program Manager for Technology Programs in the Environmental Protection Agency’s policy office and Senior Associate at the Northeast-Midwest Institute. She received her Bachelor of Science in Forest Management at Northern Arizona University and a Master of Science and Ph.D. from Michigan State in resource economics.

Article Notes:
[1] 2001 Catalyst Census of Women Board Directors,” Catalyst, 2001

[2] In 2011, the percentage of women on boards of the Fortune 500 was 16 percent, per “2011 Catalyst Census: Fortune 500 Women Board Directors,” Catalyst. Dec 13, 2011.

[3] “2016 Catalyst Census: Women and Men Board Directors.” Catalyst. 2017.

[4] Ernst & Young, “Governance trends at Russell 2000 companies,” October 2016.

[5] Gorte, Julie. “The Investment Case for Gender Equality,” Jan. 29, 2018.

[6] See, for example, Julie Gorte, “The Investment Case for Gender Equality,” Pax World Funds, January 29, 2018.

[7] Andrew Ross Sorkin, “Diversify the Boardroom, Just Not Like California,” The New York Times, Oct. 1, 2018.

[8] Michael R. Bloomberg, “Obama Didn’t Kill Coal, the Market Did,” Bloomberg, August 4, 2015.

[9] Meggin Thwing Eastman, Damion Rallis, Gaia Mazzucchelli, “The Tipping Point: Women on Boards and Financial Performance,” MSCI, December 2016.

[10] David A. Katz and Laura A. McIntosh, “Gender Diversity and Board Quotas,” Harvard Law School Forum on Corporate Governance and Financial Regulation, July 27, 2018.

[11] Don Prophete, “A Black Partner Responds to CGs on Law Firm Diversity,” January 30, 2019.

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