What's Next for Corporate Boards? Addressing Diversity Beyond Gender
George Floyd was transformational. In the wake of his death, we have seen multi-ethnic, multi-generational protests in support of racial justice; multiple public statements supporting Black Lives Matter, many performative, some genuine; and a federal legislative movement, albeit incremental, towards police reform with the House passage of the George Floyd Justice in Policing Act of 2020.
Less discussed and far less noticeable since his death have been elevated discussions expanding the racial diversity of company boards. Board diversity is typically defined through the lens of gender rather than race or ethnicity, with women comprising 26% of S&P 500 directors according to Spencer Stuart's 2019 Board Index.
Race, however, has proven far more problematic. According to ISS ESG Division's database, on the boards of the 3,000 largest publicly traded companies in the U.S., 12.5% of the directors are from underrepresented racial and ethnic groups, with Black directors comprising 4% of the total. Last year, 432 new S&P board seats were filled, 46% and 23% of which are now occupied by women and minorities, respectively. Though the representation of minorities on boards continues to lag, we are beginning to see movement to address the disparity.
Legislation Takes Center Stage
As it did with its gender board diversity mandate in 2018, California is again in the vanguard with the recent passage of legislation that promotes broader board diversity. Signed into law on September 30, 2020, it requires public companies headquartered in California to have at least one minority or LGBT board member by the end of 2021. The thresholds are subsequently tiered based on the total number of board members so that by the end of 2022, boards with more than four but fewer than nine members must have at least two minority or LGBT directors and boards with nine or more members will be required to have a minimum of three directors from an underrepresented community.
Under the legislation, underrepresented communities are defined as individuals who self-identify as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native; or gay, lesbian, bisexual or transgender. Given the scope of the definition of underrepresentation, it is yet to be seen which underrepresented group will be most impacted in terms of actual outcomes: minorities, and if so, which ones, or the LGBT community.
Similar to California's gender diversity legislation, the fine for non-compliance is $100,000 for the first offense and $300,000 for the second. Though each mandated seat not held by a director from an underrepresented community is deemed a violation of the law, reportedly, the state has been lax with respect to the enforcement of fines for violations of the previously enacted gender diversity law.
If this legislation produces an impact even remotely comparable to that of the gender diversity board mandate, then it will move the needle forward. According to Bloomberg Law, since the enactment of the gender diversity board requirement, women now comprise 45% of new board seats of Russell 3000 companies based in California, compared to 31% nationwide.
The Board Challenge, an initiative to diversify minority board representation, was recently launched in an attempt to specifically address the anemic representation of Blacks on boards. Within the next year, 17 founding partner companies, including Altimeter Capital, MM LaFleur, NextDoor, and Zillow, among others, pledged to add a Black board member. In announcing the launch, Brad Gerstner, CEO of Altimeter Capital noted, "America has been reminded again, in tragic fashion, that we must redouble our efforts to build a more inclusive society. Business leaders can't let this moment pass us by without playing our part and taking this tangible step to build a more diverse boardroom."
Race has proven to be a far harder mental leap than gender board diversity and particularly with respect to Black board members, the standard excuse is the difficulty of identifying sufficiently qualified candidates. This, however, will no longer be an "acceptable" explanation with the recent launch of Diligent's Modern Leadership Initiative. Diligent, a software provider that hosts board meetings and provides other corporate board services, is using its platform to develop a Directors Network of qualified minority candidates. CEO, Brian Stafford noted, "Even though we have moved gender diversity…if you look at racial diversity, it's just really bad…our goal is to make it as easy as possible to do the right thing." In developing the Network, Diligent collaborated with 19,000 corporate clients to nominate minority executives. In addition, it enlisted the commitment of 10, now 20, private equity firms to allocate five board seats for minority candidates from among their portfolio of companies.
A similar initiative is the Board Diversity Action Alliance, co-founded by Ursula Burns, the former CEO of Xerox; Gabrielle Sulzberger, Chair of Whole Foods; Teneo; The Ford Foundation, and The Executive Leadership Council. Launched last month, the Alliance was created to increase the representation of racially and ethnically diverse directors on corporate boards, beginning with Black directors. In addition to committing to increase the number of Black board directors to one or more, the signatories will also disclose the racial/ethnic composition of their boards as well as disclose diversity, equity, and inclusion metrics on an annual basis. Signatories include Dow, MasterCard, Nordstrom, Uber, and UPS, among others.
Individual Acts of Allyship
Complementing the legislative push and corporate activism are individual acts of allyship, the most profound being Alexis Ohanian's decision to resign from the Board of Directors of Reddit, which he co-founded. In relinquishing his board seat, Ohanian, urged that his seat be filled by a Black candidate, which it was, by Y Combinator Partner and CEO, Michael Seibel. In announcing his resignation, Ohanian, who is also the husband of Serena Williams, said "It is long overdue to do the right thing. I'm doing this for me, for my family, and for my country. I'm saying this as a father who needs to be able to answer his Black daughter when she asks, "What did you do?"
George Floyd made a difference in ways he could have never anticipated. His death was transformational and triggered an inflection point in this country, the full impact of which is only yet to be realized.