Episode #23: Diversity in the Boardroom (Allison Leopold Tilley)

Joel Simon: We’ve selected a topic that’s been front and center business news but seems to be gaining even more momentum lately. I know you’re passionate about this topic and I can’t wait to hear your perspective on it—diversity in the boardroom. Perhaps you can give our listeners a little background on this issue and then talk about some recent legislative developments in California that are helping to drive progress in this area.

Leopold Tilley: Diversity in the boardroom is a topic that has been around for a long time, but we’ve seen very little progress in the area. However, California has recently taken a leading role on board diversity. California has passed a few bills relating to companies incorporated in California and also companies that are headquartered here. In 2018, California passed SB 826, which required boards to have one female director by the end of 2019 and either two to three in total by the end of 2021, depending on the size of the board. Now California just announced another bill on September 30th. It is SB 979 and that requires that boards achieve other diversity, as well. SB 979 requires that boards have at least one director from under-represented community by the end of 2021 and two to three by the end of 2022. Similar to the rule in connection with female directors, this role requires that boards with five to eight directors have at least two diverse directors on their boards. Or, if they have nine or more directors, that they have three by the end of 2022.

You might wonder what it means to be a director from an under-represented community. At this point, there is not a lot of guidance as to exactly what that means, but what California has stated that it is based on individuals self-identification in the categories of Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native. Also, people who identify as gay, lesbian, bisexual or transgender. Both of these laws require that the secretary of state publish a report on the number of corporations in compliance. So, it is very interesting to see what companies are actually doing. The last report was in 2019, so not too far into SB 826, which was about female diversity. When that was published, they noted that there are 537 companies that are subject to the rule, and at the point about 184 were in compliance. So, it is a little disappointing the number that were in compliance at the end of the first year when they only needed to have one woman on the board. But at least we are seeing movement in the right direction.

Simon: I agree, Allison. Although it does seem like now might be a good time to see more progress. Because in addition to legislative initiatives, there’s also been a strong push by activist investors and asset managers, such as BlackRock, StateStreet, CalSTRS and CalPERS. Can you tell us more specifically about some of these efforts and the impact they are having?

Leopold Tilley: I am happy to do so and I might add given the timing of while we are recording this, Joel, that we now have our first female Vice President-Elect. So hopefully that will have some impact on the role, as well.

BlackRock is the world’s largest asset manager and they have called for their portfolio companies to increase gender diversity on boards. Keep in mind that this came out last year and the California effort to increase diversity came out this year, so it will be interesting to see if BlackRock moves their diversity initiatives from just the female aspect. They are also practicing what they preach as they have five female directors on a board of 18 and one African-American director according to BlackRock’s self-disclosures. They have also made a commitment to achieving 30 percent female representation in their senior management by 2020. Hopefully, money talks because BlackRock manages $6.85 trillion in assets around the world! And we definitely saw some impact in the 2019 proxy season as to how people were voting. In addition, ISS, one of the self-governors of corporate governance, in 2020 updated the rules of what they are going to look for and they are now are asking companies to account for the lack of women on their boards. For the upcoming proxy season, ISS has said that they will recommend against the chair of the nominating committee or other directors as they determine, if the board has no women directors or if it lacks a “firm commitment” to achieving gender diversity. What they state is required to have a “firm commitment” is a plan with measurable goals. So, it will be interesting in this proxy season what impact that has.

Simon: I have also noticed that a number of the activist investors and asset managers are actually publishing the numbers of board slates that they have voted against as a way to show they are really putting their money where their mouth is. I know that California often receives a lot of criticism for what some people view as overreaching or imposing their unique views on companies that have no choice but to comply because of the importance of the market, but it often turns out that California is ahead of the curve on issues that eventually develop a broad following and are later recognized as having been the right thing to do all along. Motor vehicle emissions and safety are an obvious example; it seems to me that board diversity will be another one. I know there is an intuitive sense that these developments are the right policy, but isn’t there empirical data to support them as well?

Leopold Tilley: There definitely is. As for overreaching, since California’s rules apply to both California incorporated companies but also a company’s headquarters, a lot of people think that they don’t have the ability to regulate companies that are headquartered here, and only the companies that are incorporated here. Thankfully, nobody has taken this to court—and I don’t think any company wants to be poster child suing against diversity—so at the moment everyone is working to comply with this. For those that are data driven, there is a lot of information out there as to why this is a good idea from a business point of view versus just a socially good thing to do.

In a McKinsey study, they found that diverse boards of directors are 43 percent more likely than non-diverse boards to achieve financial performance above the national industry median. So that’s where, once again, money talks. In a PwC 2019 Survey, they found that 94 percent of directors agreed that board diversity brings unique perspectives to the boardroom and 76 percent of existing directors said they believe it enhances company performance.

Also in 2019, EY, not to be outdone by PwC, came out with a report that stated more than half of investors that they spoke to noted that board diversity should be a top focus in making investment decisions. They also noticed that after growing just one percentage point each year since 2013, the rate of increase in women-held directorships has doubled, increasing two percentage points in both 2018 and 2019 so that now 23 percent of public company boards are women. If this pace sustains, there would be gender parity in the S&P 1500 by 2033. That is still a long way off, but just two years ago it was estimated to be around 2046. So at least we are moving, once again, in the right direction.

Simon: Indeed!

Leopold Tilley: And then there was a very interesting article that just came out in September on Boardmember.com. Don Knauss, who is on the boards of Target, Kellogg and McKesson, stated that he thinks management needs to focus on its core processes in current times and that the key to doing so is having the relevant skill sets and the diverse skill sets and points of view on the board governance level. He that that requires a broad mix of perspectives—gender, racial, cultural, age and even industry experience—and that having that wide spectrum of expertise leads to more robust discussions at the board level. He also noted that there is evidence that a heterogeneous group does a better job of getting to the right solution than a homogenous group and that is more and more important today when businesses are facing these unprecedented times or a global pandemic and trying to figure out how to manage themselves and how to adapt. Having a diverse board helping them navigate through these difficult times is a proven benefit.

Simon: It sounds like the stars may have finally aligned to really make these efforts successful, combining legislation, grass roots support and data to back it all up. To wrap up, can you tell us how companies have been reacting to these developments?

Leopold Tilley: I think companies are taking them seriously. They are understanding not only the requirement of having a diverse board but the benefit as well. We noticed that there is a lot of activity in the recruiting of female board members and in new interest with the new California regulations in first starting to have existing boards self-identify, so a company knows what their landscape is and then reaching out to recruiters and networks to find a more diverse board candidates. I can tell you that numerous boards that we work with, most of them had at least one female director but now they are very actively focusing on adding more female directors and becoming more diverse in gender, ethnicity, sexual orientation—all the different diversities. They are very focused on increasing that representation on their board. I have a client that is just about to go public that has a board of seven people, of which five are women. To me, that is amazing, and it shows there is a real evolution in what the boardroom is going to look like.

Simon: That’s excellent. Allison, I’ve really enjoyed chatting with you about these board diversity developments and the impact they are having on companies. Thank you so much all your great insights.