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Amid rising political heat over diversity in America, it’s good to zero in on racial and gender inclusion across the nation’s boardrooms. You’ll see both progress and challenges. One new discovery up front: the best shareholders in America appreciate board diversity.
Few dispute female and minority underrepresentation on corporate boards compared to the population. Although Blacks comprise 13.4% of the U.S. population, close to 200 companies in the S&P 500 SPX, +0.52% have no Black director and only 8% of that cohort’s directors are Black, based on data collated by Institutional Shareholder Services.
While every S&P 500 board has at least one female director today, women hold only 25% of the total seats. Among the broader Russell 3000, just 20% of seats are held by women, although almost 200 of those companies have 20% or more female members, according to the advocacy group 2020 Women on Boards.
All these percentages are up from a decade ago, and there is reasoned debate over the pace of change. But disagreement rages on the causes of underrepresentation. Among disputed causes: lack of prioritization by boards; gender and racial stereotypes or in-group bias, and underrepresentation of women or minorities in traditional pools or pipelines (which may, in turn, owe to stereotypes and biases).
One reason the rate of progress is slower than some desire may be the mixed rationales for the quest. There are two broad potential rationales for board diversity: (1) the quantifiable economic interests of corporations and their shareholders, and/or (2) the qualitative social aspects of group decision-making and intuitions of fairness.
“ Numerous studies find a positive association between gender diversity and economic performance. ”
Empirical research on whether diversity improves corporate economic performance is equivocal. Numerous studies find a positive association between gender diversity and economic performance, including those of Catalyst and J.P. Morgan Research. But almost none find any causation, according to a comprehensive survey by researchers at Stanford University. The data may reflect that high-performance leads to diversity, as much as that diversity leads to high performance.
Testing the effects of board diversity on economic performance is complicated by the variety of relevant contexts to consider — such as board and company size, geography or industry— as well as the variety of board settings, such as addressing acquisitions, dividends, executive pay, financial reporting or corporate culture.
The social case is more compelling. First, the strongest general argument for board diversity is simple: the best group decisions result from a small number of people with a wide variety of backgrounds viewing an issue from many angles. It is also clear that boards should reflect a corporation’s various constituents, meaning diversity not only of race and gender but varying ethnic, cultural and other personal characteristics.
Mere tokenism won’t suffice. Evidence suggests that only with a minimum representation of at least 20% do contributions of outsider groups cease being representative of that group but get judged on merit. That occurs more readily when members are selected voluntarily rather than by compulsion. That’s one reason why legal diversity quotas, such as California recently enacted for companies headquartered there, may miss their mark. But the Business Roundtable recently issued a sweeping commitment to inclusion, and the boardroom is a natural place for that elite group of CEOs to focus.
“ America’s best shareholders and board diversity go hand-in-hand. ”
As for what shareholders might think, the nearly 200 companies with at least 20% female directors, as identified by 2020 Women on Boards, feature the most patient and focused shareholders in America. These are shareholders with the longest average holding periods and most concentrated portfolios. Warren Buffett dubbed this cohort “high-quality shareholders” (QSs for short) and evidence shows that high densities of QSs in a company are associated with superior corporate performance.
The Quality Shareholders Initiative at George Washington University ranks more than 2,000 large public companies by QS density, including most of those identified by the 2020 Women on Boards as having the greatest percentage of women directors. Among those, 70% are in the top half for QS density and 15% are in the top decile. Here’s a short list:
Alliant Energy LNT, +1.47%
American Tower AMT, -2.47%
Arthur J. Gallagher & Co. AJG, +0.13%
Eli Lilly & Company LLY, +0.24%
Estee Lauder Companies EL, -0.01%
International Flavors & Fragrances IFF, +1.26%
Johnson & Johnson JNJ, +0.79%
Kaiser Aluminum KALU, +2.38%
PepsiCo. PEP, +0.00%
Stryker Corporation SYK, +1.69%
Sysco Corporation SYY, +2.21%
Concerning Black directors, the Quality Shareholders Initiative crunched the data from Institutional Shareholder Services of S&P 500 companies. One notable finding: a select group of such companies boasts three Black directors over the past few years, all representing at least 20% of the board. Every one of those companies ranks in the top half for QS density, including these:
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AFLAC AFL, +2.34% DTE Energy DTE, +1.29% Eversource Energy ES, +0.91% Marriott International MAR, +5.95% |
Nike NKE, +0.45% Omnicom Group Inc. OMC, +0.15% Public Service Enterprise Group Inc. PSE, +3.83% Salesforce.com CRM, -1.79% |
Southern Co. SO, +2.87% Verizon Communications VZ, +1.02% WEC Energy WEC, +0.70% |
What might explain these associations? The correlation between QS density and diversity, of both gender and race, may be due to the long-term horizons of QSs. Compared to the short-term view of transient shareholders, QSs benefit more from the multiple viewpoints on boards that come from diversity.
The association between QS density and multiple Black directors on a board may reflect the focused investment approach of QSs. Indexers, who own small stakes in every company, may have to be content with quota-type guidelines advocating one minority director per board. QSs, who focus on particular companies, care about individual identities, which may result in greater diversity than a quota system would yield.
There may be a long way to go on board gender and racial diversity, and it remains true that the social case is stronger at present than the economic one. Everyone also agrees that director quality remains paramount. But these observations do suggest that America’s best shareholders and board diversity go hand-in-hand.
Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University. He owns shares of Berkshire Hathaway. His new book is Quality Shareholders: How the Best Managers Attract and Keep Them. Register for his upcoming free book talk, hosted by the Museum of American Finance and Fordham University here.
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