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Monday, May 15, 2017

How Diverse is Your Boardroom?


Diversity is a popular buzzword in strategic management today, and it brings real advantages to public company boards of directors, as well as private company management teams. In February, the Advisory Committee on Small and Emerging Companies recommended that the Securities and Exchange Commission (SEC) expand the disclosure rules about the diversity of board members.

Diversity Counts
Getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. SEC Chief Accountant Wesley Bricker recently said that diversity of thoughts diminishes the extent of group thinking, and diversity of relevant skills (for example, industry or financial reporting expertise) enhances the audit committee’s ability to monitor financial reporting.

Bricker is urging public company audit committee members to consider putting diversity on their agendas in the coming year. He said investors have been appropriately focused on increasing corporate board diversity, and they want companies to disclose the extent to which their boards are diverse in race, gender and ethnicity. According to Bricker, academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable after poor financial performance.

This concept also extends to private businesses. Management teams with people from diverse backgrounds and/or functional areas expand the company’s abilities to respond to growth opportunities and potential threats.

Although boardroom diversity is improving, it still has a long way to go. For example, the proportion of women-held directorships among Standard & Poor’s 1500 index companies grew only 1% in 2016, with just 18% of those board seats now held by women. The 1% growth rate has stayed consistent over the last five years, suggesting that parity won’t be reached for more than 30 years.

The Future Is Uncertain
In 2009, the SEC issued Release No. 33-9089, Proxy Disclosure Enhancements, to set a number of disclosure rules, including the extent to which the company considers diversity in selecting board candidates. But several institutional investors — including the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund — said the requirements don’t provide enough information and haven’t sufficiently increased diversity on corporate boards. In the meantime, the SEC’s Advisory Committee on Small and Emerging Companies has made a set of recommendations for improving the disclosure rules about the diversity of boards of directors.

Former SEC Chair Mary Jo White had made better disclosures about boardroom diversity a priority for rulemaking. Last year, her staff prepared a rule proposal for the SEC to consider. However, White left the agency in January, at the end of the Obama administration, before considering the staff’s recommendation.

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