A lot of worthwhile energy in the last few years has been concentrated on increasing diversity in corporate leadership—especially board gender diversity— but how much progress is being made at the level of the C-suite? This paper from the Rock Center for Corporate Governance at the Stanford Graduate School of Business addresses the sorry state of the C-suite as a whole when it comes to diversity of any kind. According to the paper, notwithstanding numerous efforts launched by asset managers, institutional investors and companies to increase diversity in board and senior leadership, these efforts “have not contributed to tangible progress in increasing the prevalence of diverse executives in corporate leadership positions.” Why have these efforts not been more successful? The paper looks at C-suite (CEO and direct reports) demographics to get a better handle on the “actual pipeline, as it stands today, for next year’s newly appointed CEOs and future board members.”
Since State Street Global Advisors launched its “fearless girl” campaign in 2017 (see this PubCo post), a number of institutional investors, asset managers and others have taken steps to promote diversity, especially gender diversity at the board level. For example, BlackRock (reportedly the largest asset management firm) has made clear that it expects “boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. In addition to other elements of diversity, we would normally expect to see at least two women directors on every board.” (See this PubCo post.) And SSGA has announced that, starting this year, it will vote against the entire slate of board members on the nominating committee if a company does not have at least one woman on its board and has not engaged in successful dialogue on board gender diversity for three consecutive years. Early this year, the new Goldman Sachs CEO made some news when he told CNBC that, starting July 1, in the U.S. and Europe, Goldman will take companies public only if there is “at least one diverse board candidate, with a focus on women…. And we’re going to move towards 2021 requesting two.” He continued that, recently, there have been about 60 companies in the U.S. and Europe that have gone public with all white, male boards. However, over the last four years, “the performance of public offerings of U.S. companies with at least one female director is ‘significantly better’ than those without.” (See this PubCo post.) And the Office of the NYC Comptroller has continued its Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity, which called on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller’s Office, companies were asked to commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs were selected. (See this PubCo post.) And, of course, there is SB 826, the California board gender diversity statute, which requires a minimum number of women on the boards of public companies with their principal executive offices located in California. (See this PubCo post.)
Why is diversity important? The authors observe that proponents of diversity contend that “increased representation across gender and ethnic groups improves corporate decision making,” although the authors note that the evidence on this point is not conclusive. But diversity is also “consistent with fairness and demonstrates that leadership opportunities should be equally available to all qualified members of the workplace.”
And, the authors note, companies have also expressed their commitments to diversity, promoting their efforts on their websites and in their corporate social responsibility reports. They report that half of companies in the Fortune 100 “disclose diversity and human capital oversight efforts at the board level” in their annual proxy statements and also signed the Business Roundtable new Statement on the Purpose of a Corporation (see this PubCo post), which committed to “foster diversity and inclusion, dignity and respect.” Some companies also include diversity-related performance metrics as a component of their executive incentive compensation plans.
Nevertheless, the authors observe, “diversity on boards and in senior leadership positions has not reached the levels to which advocates aspire.” A study by ISS showed that
“women comprise 27 percent of S&P 500 board seats and 19 percent of mid- and small-cap company board seats…. Non-white ethnic minorities hold only 10 percent of directorships among Russell 300 companies….Despite most companies explicitly expressing an interest in recruiting new directors from these groups, gains have been modest for females and almost nonexistent for racially diverse candidates. Diversity efforts at the CEO level have been less successful, with women holding only 7 percent and ethnically diverse executives only 9 percent of CEO positions among Fortune 500 companies.”
To understand the pipeline for board and executive positions at the highest level, the paper looked at the number and “specific functional roles” of diverse executives at the senior leadership level among Fortune 100 companies during the period from December 2019 to February 2020. Why functional roles? Typically, to even be considered for a board seat or position as CEO, candidates must had appropriate experience in the necessary managerial and functional skills. Although there has some effort to encourage boards to expand their searches outside the traditional box, the authors maintain that, for a board seat, the candidate usually needs “CEO, operating, or senior finance experience. In 2019, 68 percent of new independent directors had these backgrounds….For a CEO, this means having profit or loss (P&L) responsibility or CFO experience. Over 90 percent of internally promoted CEOs served in a role with one of these responsibilities prior to appointment.” The paper’s data showed that, for 675 companies in the Fortune 500 and S&P 500, the CEO’s immediate prior positions were most often COO (25%), divisional president (25%) or president (15%). According to the paper, only 5 percent of CEOs were promoted from other roles, such as marketing, risk management, human resources or general counsel. A key factor they identify is being a direct report to the CEO: “Almost no companies promote a CEO from more than one level below the CEO.”
With that in mind, the paper considers the composition of direct reports to the CEO among the Fortune 100 and what that tells us about the board and CEO pipeline. How deep is the diversity bench? If C-suites are not diverse, and especially if the roles that lead most directly to board and CEO positions are demonstrably not diverse, are “companies actually preparing diverse executives to be viable successors to the CEO? Are they effectively equipping them to serve as board members at other corporations?”
The authors’ findings on gender diversity:
- “Women are severely underrepresented in the C-suite. Only 25 percent of total C-suite positions are held by women. Only 7 companies have a female CEO. Nine of the Fortune 100 have no women directly reporting to the CEO (C+1 level).
- Women are underrepresented in the most common C+1 positions. The three most common direct reports of the CEO are P&L leaders, CFOs, and general counsel. Women hold only 15 percent, 14 percent, and 35 percent of these roles, respectively.
- Women are underrepresented in positions that directly feed into future CEO and board roles, and they have greater representation in positions that are less likely to lead to these appointments. Women hold only 13 percent of positions with high potential for CEO promotion and board recruitment (CEO, CFO, and P&L leaders). By contrast, they hold 38 percent of positions with lower potential for advancement (general counsel, human resources, chief risk officer, etc.). That is, the representation of women in the C-suite is skewed toward lower potential positions.
- Very few companies have a ‘deep bench’ of female executives. Nine companies have no women in the C-suite. Women comprise a third or more of the C-suite in 27 Fortune 100 companies, 40 percent or more of the C-suite in 10 companies, and half in only 2 companies. No Fortune 100 company has a majority of female executives in the C-suite.”
The authors’ findings on racial and ethnic diversity:
- “C-suite is even less diverse by race. Racially diverse executives hold only 16 percent of total C-suite positions. Only 16 have a non-white CEO. Twenty-six of the Fortune 100 have no ethnic diversity at the C+1 level [direct reports], and 6 have no ethnic or gender diversity at this level.
- The CFO role is the least racially diverse position in the C-suite. There are only 4 CFOs who are not white.
- The representation of racially diverse executives in the C-suite is slightly skewed toward positions with lower potential for advancement. Similar to our finding above, we find that ethnically diverse executives have lower representation in positions that directly feed into future CEO and board roles—although the degree to which this occurs is much lower than it is among female executives. Racially diverse executives hold only 13 percent of high potential positions (CEO, CFO, and P&L), and 20 percent of lower potential positions. The very low prevalence of nonwhite CFOs accounts for almost all of this skewing.
- Few companies have a large number of racially diverse executives in the C-suite. Twenty-six companies have no racially diverse executives in the C-suite. Non-white executives comprise a third or more of the C-suite in only 13 companies, 40 percent or more in only 5 companies, and half or more in only 2 companies.”
From these findings, there is no getting around the uncomfortable conclusion that the levels of diversity in the C-suite are inadequate to provide a real pipeline to some version of parity among corporate leaders. This deficiency is particularly striking with regard to the paucity of diverse executives in roles that the authors identify as “most likely to be prime candidates for advancement.” Especially notable is the relative prevalence of women executives serving in “terminal functional roles that are not typically on a path to becoming CEO” or to board service. The authors’ data showed that 71 percent of chief human resource officers, 71 percent of chief administrative officers and 59 percent of chief communications officers were women, all positions identified as having lower potential for promotion to CEO.)
While companies loudly promote the concept of diversity, the authors ask where the process breaks down in practice? Do diversity statistics that do not include or differentiate C-suite diversity actually “obscure the degree to which the highest level of corporate leadership lacks diversity”? Shouldn’t companies be doing more to see that diverse candidates are better prepared for opportunities to gain P&L and CFO experience? The authors conclude that “[u]nless changes are made, the current composition of the C-suite of Fortune 100 does not portend well for increased diversity of corporate leadership in coming years.” As the chair of the NACD has previously commented in the context of board diversity, the “system produces white male candidates unless board leaders deliberately do something different.”