Big Companies Say They Favor Diversity, Most Refuse to Prove It

A majority of large-cap companies say they are working to advance gender and racial diversity in the boardroom but less than half are willing to disclose how their efforts are proceeding, according to a new study.

About 45% of companies disclose the composition of their boards by gender and almost 40% disclose the ethnicity of the directors, Equilar, which provides executive compensation benchmarking and tracking tools, found after analyzing the 2017 proxy statements of 500 of the largest U.S. companies. Still, that is less than the 60-plus percent of companies that say they consider gender and ethnicity when assessing director candidates, according to the Equilar study released on Wednesday.

Source: Equilar
Source: Equilar

Half of the industrial goods companies studied disclosed gender diversity in board composition, the highest among all the sectors, while about 48% of the companies disclosed board composition by ethnicity and race, according to Redwood City, Calif.-based Equilar. The healthcare sector followed with 48.1% of companies reporting board composition for both gender and ethnic/racial diversity. The basic materials sector was the least likely to disclose boardroom diversity information.

Data of board diversity is not universally available as it is not required by law presently. Companies voluntarily provide the information, but institutional investors have been pushing for more transparency. BlackRock Inc. ( BLK) , State Street Corp. ( STT) and the Vanguard Group have made board diversity a top engagement priority this year.

BlackRock, which has $5.7 trillion assets under management as of June 30, voted for eight shareholder proposals to increase board diversity, although it did not name the companies. State Street voted against the reelection of directors at 400 companies this year because they failed to take steps to add female board members. Vanguard, which has more than $4 trillion assets under management, engaged with several companies this year regarding gender diversity and joined the 30% Club, a global organization that advocates for greater representation of women in boardrooms and leadership roles.

"Shareholders and other observers have only company disclosure to reference when seeking information about board diversity, and the more transparency we see on this critical topic, the more it will drive others to engage," said Belen Gomez, Senior Director of Board Services for Equilar.

The U.S. Securities and Exchange Commission is looking into existing disclosures of diversity composition on corporate boards and "could make such disclosures a mandatory requirement in the future," according to BDO. Recently installed SEC Chairman Jay Clayton has indicated that he will work with the SEC staff, including the Office of Minority and Women Inclusion and the SEC's Advisory Committee on Small and Emerging Companies to "monitor this issue."

Women make up slightly more than 22% of S&P 500 boards, according to BoardEx, a relationship mapping service of TheStreet Inc. That is a slight increase from 20.5% as of September 2016. Still, female representation in the boardroom declines when analyzing the S&P MidCap 400 and the S&P SmallCap 600 to 18% and 15%, respectively.

The number of minority directors appointed to S&P 500 boards fell in 2016 and the representation of minorities in the boardrooms at the top 200 S&P 500 companies "has not significantly changed over the past five to 10 years," according to executive search firm Spencer Stuart.

That being said, directors generally believe that they are addressing the topic of diversity in the boardroom. About 66% of directors say their board is "proactively addressing the issue of board diversity," although 34% of board members admit that more needs to be done, according to the new 2017 BDO Board Survey released Tuesday that examined the opinions of 130 public company directors.

"Activist proposals, particularly those suggesting changes in board composition to achieve specific desired outcomes, should be viewed as an opportunity for the board to self-reflect and consider thoughtfully the needs and concerns of its shareholders while assessing how those concerns tie into the underlying objectives of the organization's goals and strategies," Amy Rojik, BDO USA's national partner for communications and governance, said in a statement.

Increasingly, studies have shown that having a diverse boardroom leads to better financial results. A 2016 study by the Peterson Institute for International Economics revealed that women's presence in corporate leadership will improve firm performance. A 2015 McKinsey report found that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians.

"As disclosure of these facets of diversity becomes more common, the amount of research confirming the association between board diversity and long-term value is likely to increase," Susan Angele, senior advisor at KPMG's Board Leadership Center, said in a statement.

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