BUSINESS LAW
t was October 2018 , just after passage of California ’ s law requiring gender diversity on the boards of publicly traded companies headquartered in California . Esther Aguilera , president and CEO at the Washington , D . C . -based Latino Corporate Directors Association , strongly supported the new measure , Senate Bill 826 . But her experience told her she should pay close attention to what came next .
Since boards often appoint those they know and they ’ re overwhelmingly white , she thought there was a good chance Latinas would be left behind . So her group set out to determine who was getting picked under the new law . LCDA dug in to the numbers , working with two companies that track corporate governance , looking at corporate proxy statements , calling firms and sometimes contacting individual board members .
Its results , released in March 2020 , showed that by all measures , the new law did what it set out to . Through February 2020 , more than 500 board seats at companies headquartered in the state had been filled by women , by LCDA ’ s count . ( There are about 5,700 board seats total at those companies by one estimate .)
But the results also confirmed Aguilera ’ s concerns : In a state that is 39 percent Latino , 3.3 percent of those appointed were Latinas . Black and Asian American women also were underrepresented , though not as starkly ( 5.3 percent and 11.5 percent , respectively ). About 78 percent of the new appointments had gone to white women .
LCDA ’ s data received wide media attention and helped boost a bill in the state legislature , Assembly Bill 979 , that would build on the 2018 law to require appointments of traditionally underrepresented groups to corporate boards . In September 2020 , Gov . Gavin Newsom signed it into law . By the end of 2021 , the boards of California-headquartered public companies must have at least one member who identifies as one of several racial or ethnic minority groups or as LGBTQ , with the number rising for larger boards by the close of 2022 .
It ’ s not just the state that ’ s putting pressure on public company boards .
“‘ Who do you know ?’ is usually the first question that comes up when a board vacancy opens . If the board is currently not diverse , what are the chances that relying on directors ’ personal networks will result in a diverse candidate pool ?”
SIMISO NZIMA Investment director and head of corporate governance , CalPERS
The growing number of studies finding a correlation between board diversity and corporate performance has led to a wave of investment firms and asset managers asking , sometimes demanding , that companies broaden representation . The trend is spreading to private companies too , which increasingly are pledging to change the look of their directorships . Here ’ s how experts say companies can use the new push to strengthen corporate governance .
Investors are voting with their dollars
The research drawing a correlation between board diversity and company performance continues to mount . One of the latest looks was an analysis in July 2020 by Vontobel Asset Management . Of the 150 largest companies on the S & P 500 , Vontobel reported that over a fiveyear period , the firms on the S & P with the most ethnically diverse boards had earnings per share that grew 5 percentage points faster than those of the companies at the bottom on board diversity .
Correlation and causation are different entities , and other recent studies find that a board ’ s effectiveness in driving profits depends at least as much on how boards function as on how diverse they are .
But investors and asset managers , convinced by what ’ s known so far , are demanding change . On Dec . 1 , 2020 , Nasdaq asked the federal Securities and Exchange Commission for permission to adopt a new requirement that the companies on its exchange have at least one woman and one director from an underrepresented minority group on their boards — or face potential delisting . As of July 2020 , Goldman Sachs started requiring that every company it assists in an initial public offering have at least one diverse board member , rising to two beginning in 2021 .
And since July 2017 , the California Public Employees ’ Retirement System , the country ’ s second-largest retirement fund , has contacted more than 700 companies on the Russell 3000 index requesting they improve diversity on their boards out of concern for generating better returns for CalPERS retirees , says
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