In the past couple of years, board diversity has increased exponentially, as well as the demand for ethnic and gender diversity on company boards. Due to surveys that show an increase in performance proportionate to their diversity, investors are pushing for more and more women and racially diverse board members.
Goldman Sachs CEO David Solomon recently told CNBC that the investment bank would not take companies public unless they had at least one “diverse” board member.
The Missing Pieces Report by Deloitte shows that in 2020 there were almost 350 companies with more than 30% gender and ethnic diversity on their boards, which is more than twice the percentage in 2010. These and other numbers show us that the increase in diversity in recent years has skyrocketed, yet it is still not where it should be.
There is legislation in many different states that ensure board diversity, though California seems to have enacted the most legislation in America. In 2018 and 2020 California passed legislation requiring California companies to have a certain number of women and underrepresented ethnic groups. Two prominent pieces of legislation in California were recently struck down. In April of 2022, the Superior Court of California struck down AB 979 on the basis that it violated the California Constitution’s equal protection clause.
However, in 2021 SEC approved a requirement on Nasdaq companies to have at least 1 diverse director by 2023 and at least 2 diverse directors by 2025. SEC also has implemented requirements for transparency in public companies when hiring board members.
Institutional investors like Black Rock and Vanguard have also begun to advocate for board diversity. In their proxy voting guidelines, they have made it clear that if companies do not aspire to reach a minimum of 30% gender diversity and 30% racial diversity in the coming years they will vote against them. Vanguard specifically has indicated that they expect complete transparency when hiring for these positions and encourage companies to look outside of traditional candidate pools when hiring.
In 2022 there have been recent revisions by the Financial Conduct Authority (FCA) to the Listing Rules (LR) and Disclosure Guidance and Transparency Rules (DTR). The focus is on transparency in the executive hiring process so that investors and market participants will have a clear picture of companies. These rules aim to hold companies accountable for diversity among their directors.