New Paper Finds Fuzzy Definitions for Board Diversity

A 2010 federal effort to nudge companies to expand their board nominee searches to include more women and minorities has made little headway because companies are defining diversity as they choose, a new research paper finds.

Nearly all of the biggest companies are interpreting diversity as having a varied background or experiences, instead of gender, race or age, according to Aaron A. Dhir, a visiting professor at Yale Law School, who analyzed the proxy statements of the Standard & Poor stock index  of 100 companies.

“The companies,” said Professor Dhir, “most frequently define diversity with reference to a director’s prior experience or other non identity-based factors rather than his or her socio-demographic characteristics.”

Unlike some European countries that have adopted quotas to widen representation on their corporate boards, the United States has chosen voluntary measures to encourage publicly traded companies to expand the circles of people who serve in boardrooms.

A Securities and Exchange Commission measure requires that companies include in their proxy statements whether and, if so, how they take diversity into account when selecting directors of the board.

The rule, which went into effect four years ago, did not define diversity, leaving “corporations with little reason to think seriously about the socio-demographic composition of their boards,” Professor Dhir concluded after examining the companies’ responses from 2010 through 2013.

“In fact, it may make the situation worse by giving firms moral cover once they show that they have taken some form of diversity into account. There is no incentive for them to appoint more women and members of racial and ethnic minority groups.”

So far, the S.E.C. rule appears to have done little, if anything, to push up the number of women on Fortune 500 boards, which has lingered slightly under 17 percent for about a decade. And about 10 percent of companies have no women board members.

Few companies have formal diversity policies, but nearly all of the top 100 companies complied with the rule, even though few had formal diversity policies, said Professor Dhir, who includes the research in his book, “Challenging Boardroom Homogeneity: Corporate Law, Governance and Diversity,” to be published in February 2015 by the Cambridge University Press.

To monitor companies who either fail to respond or adequately explain their diversity efforts, the S.E.C. proxy enforcement staff can send out letters asking companies for additional explanation.

But only a handful of companies have received such communications and no letters have been sent in the last two years, according to Professor Dhir’s research.”There has been very little change in the content of the disclosures,” Professor Dhir said. “For the vast majority of companies, the disclosures contained the same information year after year.”

Mary Jo White, the S.E.C.’s chairwoman, acknowledged a letdown with the rule at a conference in Washington last month on women in the boardroom.

“The evidence is that board diversity makes for stronger boards,” she said, adding, “I do recognize, however, that there is also disappointment about the quality of some of the disclosures companies provide.”

She urged shareholders “to make it known that this is an issue that is important, that they want more information on what is being done to promote diversity and, if not enough is being done, what actions they expect to be taken.”

In each of the past four years, about half the companies described diversity as meaning gender, race or ethnicity, according to Professir Dhir, who is also a law professor at Osgoode Hall Law School in Toronto. Few companies mentioned age and only two companies, Goldman Sachs and Bank of New York Mellon, included sexual orientation in their descriptions of diversity.

But more than 80 percent of companies consistently cited a variety of experience or backgrounds in their explanations of what constituted diversity. That included health care giant Baxter International, which said in its 2011 proxy that “diversity of background, including diversity of gender, race, ethnic or national origin, age, and experience . . . is a relevant factor in the selection process.”

“This factor is relevant as a diverse board of directors is likely to be a well-balanced board with varying perspectives and a breadth of experience that will positively contribute to robust discussion at board meetings,” the company said.

A more effective alternative to company interpretations, Professor Dhir said, would be for the S.E.C. to amend its rule to precisely define diversity to include gender and other factors, and for companies to explain how exactly they comply with such a standard.

“It needs to be a comply — or explain — approach,” he said, “so people can see there is a process with measurable objectives.”