US boardrooms fail to reflect country’s demographics

More than two decades after Fannie Mae’s Franklin Raines became the first African American to run a Fortune 500 company, just four companies on that list have black chief executives. 

In a country where 13.4 per cent of the population is black, black directors last year accounted for just 4.1 per cent of all board seats in the broader Russell 3000 index, according to Institutional Shareholder Services (ISS) — just 0.5 per cent more than in 2008. 

Now, after the killing of George Floyd brought unprecedented scrutiny to America’s racial inequities, corporate leaders who have championed diversity and inclusion are under pressure to address the homogeneity of the teams they have assembled around them.

“Thank you for your Black Lives Matter graphic. May I please see a picture of your executive leadership team and company board?,” said California entrepreneur Brandi Riley in a tweet that went viral. 

“I am ashamed to say I do not have a single black employee who is at director level or above,” Anne Wojcicki, chief executive of DNA testing group 23andMe, admitted in her response to Floyd’s death. Reddit’s co-founder and chairman, Alexis Ohanian, resigned from the social media group’s board and called for a black candidate to replace him. 

Chart showing that more than 80% of Fortune 500 board seats are filled by white men

But most have not mentioned their boards, focusing instead on listening sessions with black employees or donations to civil rights groups. 

The ISS study shows that progress in diversifying boards has been far faster for women — who now take 45 per cent of new Russell 3000 board seats, up from 12 per cent in 2008 — than for racial and ethnic minorities.

In both the US and the UK, “they talk about diversity and it’s really around white women”, said Tangy Morgan, a senior adviser to the Bank of England’s Prudential Regulation Authority, who has worked in both countries. 

Advocates for greater female representation have found more support from legislators. California required public companies headquartered in the state which had all-male boards to add at least one female director by the end of last year. The requirement could rise to two seats by late 2021, and more states are looking at California’s model. 

Proponents urging broader representation argue that diverse boards avoid the pitfalls of groupthink by bringing a wider range of networks and experience and helping companies better understand their customers. 

“The business case has held long enough,” said Lanaya Irvin, president of the Center for Talent Innovation, a diversity-focused think-tank. “There’s plenty of research that supports [the case] that diverse teams drive innovation and outperform.”

“If you search everywhere for talent you will build a stronger team,” said John Rogers, co-chief executive of Ariel Investments, who sits on the boards of McDonald’s, Nike and The New York Times. “It’s like Reverend Jesse Jackson always said, baseball became a better sport after Jackie Robinson started to play.” 

John Rogers: ’It’s like Reverend Jesse Jackson always said, baseball became a better sport after Jackie Robinson started to play.’ © Bloomberg

A 2018 report by Deloitte and the Alliance for Board Diversity (ABD) found that women and minorities were more likely to be “recycled” by serving on multiple boards. That suggests “while the diversity of boards may be increasing, there is not necessarily an equivalent rate of increase in the number of new women and minorities on boards”.

The big barrier, Ms Irvin said, was that companies had failed to promote enough black employees to the top roles from which boards typically recruit.

“Boardrooms are white because the C-suite is still very much white,” she said: “It’s really difficult to develop a pipeline if companies haven’t done their part to develop black executives.”

Ms Morgan said she had only encountered one ethnic minority candidate in about 40 interviews of potential board members for large banks and that companies were not looking hard enough. 

Both women warned that when companies promoted senior black business executives, it was often into human resources or diversity roles from which chief executives and directors are less commonly plucked. 

“I believe [diversity and inclusion] roles quite frankly are siloed,” Ms Morgan said: “I’m more than diversity and inclusion.” 

Chart showing that US corporate reports place low emphasis on workforce diversity

Complicating matters is a lack of reporting on directors’ racial and ethnic backgrounds. There is still “pretty mixed disclosure of race and ethnicity at the boardroom level”, said Brian Stafford, chief executive of Diligent, a governance software company, and studies raise questions about the authenticity and effectiveness of the information companies do publish. 

“Transparency, or lack thereof, on important issues like diversity and inclusion reflects a company’s corporate governance approach, culture and risk mindset,” said Marjella Lecourt-Alma, chief executive of Datamaran, a software provider.

In an effort to boost transparency, the Securities & Exchange Commission in 2010 required publicly traded companies in the US to disclose whether diversity was a factor in considering board candidates, but proponents of more diverse boards said this yielded insufficient information because the regulator did not define “diversity”.

Last year it updated its guidelines, asking for disclosure on directors’ “self-identified” racial, ethnic and gender profiles and on what policies and strategies boards have for promoting racial, ethnic and gender diversity. 

Warren Buffett’s Berkshire Hathaway has disclosed to the SEC that “in identifying director nominees, the governance committee does not seek diversity, however defined”, but looks for “individuals with very high integrity, business savvy, an owner-oriented attitude and a deep genuine interest in the company”. 

At Mr Buffett’s recommendation, Berkshire shareholders at the annual meeting in May rejected a proposal demanding the company consider female and minority candidates for board seats. In March, Berkshire said Ken Chenault, the first black executive to lead American Express, would join its board.

Aaron Dhir, an Osgoode Hall Law School professor, suggests the SEC consider a “comply-or-explain” approach, requiring firms to discuss whether they have more specific diversity practices and provide an explanation if they do not. “This, arguably, would nudge corporations with more force than the rule that is currently in place,” he said.

Some companies have adopted a version of the “Rooney Rule”, said Thomas Cole, senior counsel at the law firm Sidley Austin, referring to the National Football League policy that requires teams looking for a head coach to interview at least one minority candidate.

The “nudges” provided by disclosure requirements and these voluntary rules would improve diversity over time without needing legislative quotas, he said. 

Amazon and Facebook are among the companies with a Rooney Rule. Amazon said in a filing that it was adopting a policy that “the nominating and corporate governance committee include a slate of diverse candidates, including women and minorities, for all director openings”.

Mr Rogers at Ariel said investors also had a role to play at public and private companies. “Major mutual funds and money managers are doing more through their environmental, social and corporate governance efforts, but shareholders can do more,” he said. “Institutions like big pension funds and large endowments can push venture capital and private equity together to be more diverse and put together boards that are more diverse.”

Opinions diverge on whether the surge in public attention to longstanding racial injustices will accelerate change that has been slower than many expected. 

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For Ms Irvin, it has given corporate leaders a rare opportunity “to thoughtfully redesign a corporate culture for the benefit of everyone”. Diligent’s Mr Stafford expressed similar optimism, having heard more business leaders say that their boards need to reflect their communities and employee base better.

But Ms Morgan said that a changed consensus alone would not be enough. “Someone has to step up and stop [just] talking about it. Everyone always says, ‘We need a wind farm but don’t put it in my yard’.”