For all the hype about ESG, board accountability, stakeholder demands for diversity and inclusion, a recent report on board diversity shows little change. That is not surprising. The forces of resistance to change are particularly strong, especially when directed at corporate boards. What is surprising is how resistance clings to practices that directly undermine efficiency and financial profitability.
Board diversity improves governance performance and that translates into long-run, sustainable profits. In today’s economy and with transformation of corporate operating principles, I would have expected boards to embrace change and move forward expeditiously. But the data, unfortunately, does not support such a trend.
In today’s world where racial justice is at the forefront of social concerns, corporate boards that continue to ignore the need for change will inevitably suffer reputational and ultimately financial harm. Companies have to craft a succession program that is aimed directly at improving racial and gender representation on their boards. Diversity and inclusion programs are now a must – companies that ignore this new requirement do so at their peril.
Companies have to develop board diversity and inclusion disclosure programs, coupled with the design of diversity, equity and inclusion metrics. Senior executives must be held accountable to increase minority and female representation in management positions.
The recent report card, Corporate Board Practices, contains data on board governance developments in the Russell 3000, S&P 500, and S&P MidCap 400, including information on board diversity. One notable trend is that more companies are reporting the racial composition of their boards. However, that is where the “good news” ends.
Most boards remain overwhelmingly populated with white directors. Even when it comes to newly-elected directors, less than one-fourth of them are non-white board members. We have yet to observe a substantial commitment by corporate boards to diversity and inclusion, even inf the face of ESG investor and shareholder demands. Corporations will have to address this short coming in the near term and embrace diversity and inclusion initiatives that result in significant change. A failure to do so could result in serious reputational damage.
Starting with the S&P 500 board population, nearly 77 percent are white, 13.33 percent are African America, 5.3 percent are Latinx or Hispanic and 4.1 percent are Asian, Hawaiian or Pacific Islander. With respect to the S&P Mid-Cap 400 companies and the Russell 3000, there are lower rates of African-American representation at 9 and 10.9 percent, respectively.
Within the Russell 3000 companies, the utilities sector, 15.1 percent, and the consumer, 13 percent, and communications, 12.7 percent, sectors have the highest representation of African-Americans on their boards. The lowest representation occurs on the energy, 5.2 percent) and materials company, 9.2 percent, boards. The information sector reports the highest percentage, 10.5, in board representation of Asian, Hawaiian and Pacific Islander, while utility companies maintain the lowest, 2.6 percent. Only 2.7 percent of health care companies include board members who are Latinx or Hispanic.
Corporate boards have shown some improvements with respect to gender diversity, but there is still plenty of room for additional female representation. With respect to the S&P 500, the average percentage of women serving on corporate boards rose from 20 in 2016 to 29.1 in 2021. The Russell 3000 companies increased from 15 to 24.4 percent. The largest increase occurred in the S&P MidCap 400 – from 15.8 percent in 2016 to 26.7 in 2021.
The highest percentage of female board members is in the larger S&P 500 companies – 29.1 percent. Approximately 11 percent of the S&P 500 companies have four or more female board members.
Utilities companies have the highest percentage of Russell 3000 companies with four or more female directors (12.5 percent), while the health care sector has the lowest (1.9 percent).
Among new directors, more than one-third are women. Those boards that do not have any female members have to make a clear and public commitment to increase gender participation. Again, succession planning has to include identification of a pool of serious candidates that meet gender and racial diversity requirements. Further, corporate boards should consider expanding the size of their corporate boards to increase gender and racial diversity targets.