Institutional Investors Should Prioritize Boardroom Diversity For Better Performance

Improved boardroom diversity has been linked to greater R&D results, more patents filed, and improved EPS growth

It is no secret that for all of their importance, boardrooms are often detached from the realities that most Americans live. On average, they are far wealthier, whiter, and more male than the ordinary people that make up this country.

Over the past decade, fueled by recent protests against racial inequality in the streets, the conversation about boardroom diversity has gotten more commonplace. Before, it was common and accepted to have an all-white and all-male boardroom, but now, institutional investors are scrambling to justify their decisions to a better-informed public and business community.

It is a mistake to think of diversity as capitulation towards protest or just tokenism. There is proof that improving the racial and gender makeup of a company’s board also improves its overall performance. For better profits, and because it is the right thing to do, investors and boards of directors should add new voices that bring different perspectives.

The Current State of Boardroom Diversity

Information about the racial and gender makeup of board rooms in the United States is not fully available. However, what information we do have access to paints a grim picture about the state of boardroom diversity.

Of the companies that make up the Russell 3000 Index, a market index of the 3000 largest publicly-traded companies in the U.S., only 18.5% have female directors. 13.4% of the largest companies do not have a single woman on their board. What companies do have women on their board do not open up leadership opportunities to them. Less than 5% of America’s leading companies have a female board chair, and less than 20% have board committees that are led by women.

The situation for racial diversity is even worse. Recent research from The Conference Board found that 80% of people sitting on a company board are white. However, this only takes into account information from companies that disclose the ethnic makeup of their board, which is only about 10% of the S&P 500.

The actual numbers are probably far worse as companies that do not disclose either do not take race into account at all or are embarrassed about their homogenous boards.

There has been progress over the past few years, although it is slow. For example, the amount of women on Russell 3000 company boards has increased by over 4% since 2016, which is still far too low. However, the public and many institutional investors alike are pushing corporate boards to move faster.

Why Diversifying Matters

Boardroom diversity is important from a moral standpoint, as the people making decisions about a company should be representative of the employees and the public. However, institutional investors should take note of the fact that diversifying a boardroom also improves a company’s performance.

Research by Vontobel Asset Management found that publicly traded companies that had ethnically diverse boards perform better than those whose boards were all-white. Diverse companies on average had a higher five-year EPS growth, or earnings per share growth. They were also more successful when it came to international sales.

Another study cited by BlackRock focused only on the impacts of gender diversity on a company’s success, but even then the impacts were decisive. A company that had just 10% more female directors had a large increase in patents and research citations. Thus, diversity boosts innovation, which in turn separates a company from its competitors.

A company’s people are part of its assets just as much as raw materials or shares are. As such, a group of board members who can draw from diverse experiences or bring different skill sets to the table can make a company more flexible and more successful in the end.

Bringing different skill sets to the table can make a company more flexible and more successful in the end.
Institutional Investors Should Prioritize Boardroom Diversity For Better Performance

Pressure to Diversify

Profits are not the only thing urging companies to speed up their boardroom diversity implementation plans. Local governments such as the Office of the New York City Comptroller are launching initiatives such as the Boardroom Accountability Project, which names companies without policies to include women and minorities in the pool for director nominees.

California has bills in the legislature that mandate companies headquartered there to meet diversity quotas, and other states are considering following suit.

Influential companies in the world of business are also playing a role in shaping the diversity agenda. BlackRock included a provision that the company may vote against boards that are insufficiently diverse in their “Investment Stewardship Engagement Priorities for 2021.”

CalPERS named diversity as one of the qualities that define Board Quality, a core issue that affects the longevity of companies. Glass Lewis will prioritize gender equality by voting against a nominating committee chair if his board has fewer than two female members starting in 2022.

It is clear that the ethnic and gender makeup of the board of directors will come under more scrutiny from the public, prominent investments, and even local governments.

What Institutional Investors Can Do

Investors have some power over their portfolio companies and can leverage their influence to promote diversity within the company. While the recommendations of an institution such as BlackRock will have more impact than that of a smaller institution, investors can still help push companies towards diversification.

Institutional investors can also communicate with boardrooms to combat the myth that diverse candidates simply are not qualified to sit on the board. Too often, boardrooms only look to the C-suite for directorial candidates, when that level of business also has a persistent problem with diversity.

This means that boards ignore candidates that may be just as knowledgeable and competent, but were passed over for a promotion due to their race or gender. Investors can combat this misconception or promote better head-hunting tactics.

Diversifying the boardroom is a priority to help companies keep up with their time and boost their bottom line. Improved boardroom diversity has been linked to greater R&D results, more patents filed, and improved EPS growth — and the effects that have not been studied yet are probably even greater. What is your company doing to diversify the boardroom, or what do you wish it would do? Share in the comments below.

Eduard Korsinsky | Litigation View

About the Author: Eduard Korsinsky

Eduard Korsinsky has represented clients in securities cases, derivative actions, consumer fraud, and complex commercial matters for over 20 years. Since 2003, He has been a Managing Partner of Levi & Korsinsky LLP, a firm with over 65 employees in four offices.
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