Thanks to California, corporate board diversity or, more specifically, gender diversity, is in the news again. SB 826 which, according to news reports, Gov. Jerry Brown is expected to sign, passed the state Senate in a 23-9 vote and the Assembly in a 41-26 vote. The statute would require “publicly held domestic or foreign corporation[s] whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California” to have a minimum of one female director on its board by the end of 2019. By the end of 2021, those numbers would increase for corporations with five directors, who would need to have a minimum of two female board members, and for corporations with six or more directors, who would need to have at least three female board members.
The bill provides the usual business case for board diversity, claiming that “publicly held companies perform better when women serve on their boards of directors.” The bill then goes on to cite as evidence a number of reports, including by MSCI and Credit Suisse, among others.
I have detailed at some length, both here, in a series of papers (co-authored with Lissa Broome and John Conley), in a piece for the NY Times, and in a recent public radio debate, why these studies that simply confirm the well-known correlation between board gender diversity and firm performance cannot be taken as evidence that gender diversity causes superior performance. This is more than just a recitation of the old “correlation doesn’t equal causation” argument. In this case there are strong empirical and theoretical reasons to believe that such a conclusion is premature.
As an empirical matter, although some peer-reviewed studies do show improved corporate performance (or other benefits, e.g. better compliance with legal mandates) from having more women on boards, others show no effect or even a negative effect. As a theoretical matter, there are other plausible explanations for the correlation. For example, better performing firms could have the luxury to focus on board diversity in a way that firms struggling to meet basic earning goals might not. In fact, this point was emphasized to us in a number of director interviews, including interviews with female and minority directors.
In addition, women and minority directors with the type of C-suite experience generally preferred for corporate boards are fairly scarce commodities who may have the luxury of choosing only the most profitable and least risky boards on which to serve. There are exceptions to this — for example, financial and accounting expertise are in high demand, and many of our respondents told us that they thought this was an avenue by which more women might be included on boards. Moreover, we might question whether the qualifications demanded of directors do more to exclude women and minorities than they do to ensure director competency. These are valid and important questions, but don’t undercut the argument that women are drawn to profitable companies, rather than create profitable companies. Finally, both gender diversity and superior firm performance could be caused by some third factor – for example, a forward-looking management.
All of this is detailed in the articles that I will link to below. But, the point is that the evidence cited in SB 826 to justify intervention in the director selection process does not show what the bill and its supporters claim. In addition, as I discuss in Thursday’s radio interview, the bill has constitutional problems. The bill’s sponsors apparently recognize that quotas present an Equal Protection Clause problem yet argue that their proposal does not constitute a quota – a claim I contest in the interview. I expect discussion to increasingly focus on those issues if, as expected, the bill becomes law.
Including more women (and minorities) on corporate boards is a good thing. In all of our articles, Lissa, John, and I discuss a number of social goods that might emerge from having a more inclusive environment in the power structures of American corporations, including its boardrooms. For example, a focus on board diversity might encourage corporations (and search firms) to look outside of their usual networks for directors – networks in which women and minorities tend to be underrepresented. A diverse board might signal to consumers, employees, and other constituencies that their voices and views are represented in the highest reaches of American businesses. And one might simply argue that it is unfair that the (rather considerable) financial benefits that stem from directorships in many public corporations are not shared more equally by women and other underrepresented groups.
But we need to be realistic about what board diversity can and cannot accomplish, and more honest about what the evidence does and does not show. A failure to do so could well set back the cause of gender (and racial diversity) in the boardroom and, more importantly, in corporate management.
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Articles and book chapters about board diversity:
Diversity and Talent at the Top: Lessons From the Boardroom, in Diversity in Practice: Race, Gender, and Class in Legal and Professional Careers 37-80 (Spencer Headworth et al eds., 2016) (with John M. Conley & Lissa L. Broome)
A Difficult Conversation: Corporate Directors on Race and Gender, 26 Pace International Law Review 13-22 (2014) (with John M. Conley & Lissa L. Broome)
The Danger of Difference: Tensions in Directors’ Views of Corporate Board Diversity, 2013 University of Illinois Law Review 919-958 (2013) (with John M. Conley & Lissa L. Broome)
Dangerous Categories: Narratives of Corporate Board Diversity, 89 North Carolina Law Review 759-808 (2011) (with John M. Conley & Lissa L. Broome)
Does Critical Mass Matter? Views from the Board Room, 34 Seattle University Law Review 1049-1080 (2011) (with Lissa L. Broome & John M. Conley)
Narratives of Diversity in the Corporate Boardroom: What Corporate Insiders Say about Why Diversity Matters, in Discourse Perspectives on Organizational Communication 201-660 (2011) (with John M. Conley & Lissa L. Broome)
Signaling Through Board Diversity: Is Anyone Listening?, 77 University of Cincinnati Law Review 431-464 (2008) (with Lissa L. Broome)
In the media:
KQED Radio, debate with Betsy Berkhemer-Credaire, board member and past president, National Association of Women Business Owners of California, which sponsored SB 826
Prior Faculty Lounge blog posts: