Toward Better Boards, and More Diverse Boards

Well, apparently now it’s the nominating and governance committee’s turn to be hammered on the anvil of corporate governance reform.

We see the evidence everywhere: a report from the Government Accountability Office noting that at current pace, women will represent half of all seats on corporate boards sometime around 2055. Calls for more women, minorities, and younger directors from all sorts of activists and regulators, and even a few quotas for women on boards already in place in Europe. Earlier this week Mary Jo White, chairman of the Securities and Exchange Commission, made headlines when she said that the SEC may consider proposing more disclosure about boardroom diversity.

None of this is surprising, and little of it is even a bad idea (although I can’t say I love the part about quotas). Critics are correct that too many corporate boards are still stuffed with older white guys, simply because that tends to be the social group older white guys know. White hedged her words on exactly what the SEC might do—SEC staff will only review existing disclosures, and possibly recommend more detail—but nobody would dispute the fundamental premise that diversity among corporate boardrooms hasn’t improved at a quick pace.

Still, we shouldn’t assume that more diversity in the boardroom automatically translates into more effectiveness in the boardroom. I strongly suspect it helps, but we have a larger problem here, too: boards seem to be struggling no matter sits around the table.

That was another observation that struck me as I participated in a corporate governance forum earlier this week to explore the board’s role in enhancing company resilience. One participant who researches governance trends mentioned the growing “skills gap” among corporate directors today. And I couldn’t help but think: people today aren’t any less skilled than the previous generation; the human brain hasn’t been shrinking in the last 30 years. What’s really happening is this: the skills gap we all perceive is because the skills a board needs are increasing at a faster rate—and a more diverse bunch of directors won’t necessarily cure that.

For example, plenty of people will argue for younger directors. What they really mean is, “We need directors who understand social media and young people know that stuff.” In the strictest sense they’re correct, although if you want a master of social media you can do no better than George Takei, who is 78. But think about the underlying concern here: boards are falling behind on management of technology issues.

If we as a nation really want to solve that problem on a permanent basis, the much better approach is to revise Regulation S-K entirely and require all boards to have a committee that takes point on risk or technology. We won’t do that, of course, because Washington is so politically paralyzed that it can’t do anything. But that doesn’t change the truth that systemic reform of board structure to reflect modern challenges is much better than requiring yet more disclosures that investors hardly ever read anyway.

Let’s keep going with younger directors. The implicit sentiment in wanting younger directors is that we don’t want older directors, who have been on the board forever, and now just want to coast on their six-figure annuity of boardroom fees rather than challenge the CEO. Again, if we want to solve that problem of low-energy directors who don’t bring sufficient skepticism, sure we can impose more requirements on the nominating and governance committee in some “comply or explain” approach for appointing septuagenarians—or we could just declare that any director, of any age, who has been on a board for more than seven to 10 years loses his outsider status.

After all, more than a few septuagenarians bring plenty of fresh skepticism to a board. If you doubt this, go talk to any CEO who has dealt with Carl Icahn.

The unfortunate truth is that if we really want more women and minorities on boards in short order, we will need to impose quotas. Politically that is not going to happen in this country; even Mary Jo White herself said in a speech about boardroom diversity in November, “quotas are not the path we follow in the United States.” So instead we go down the disclosure road, a middling path that burdens compliance and legal officers with yet more work, that usually neither helps investors nor solves the problem at hand.

When I think about more disclosure of director diversity, I can’t help but recall all the additional disclosure burdens we’ve placed on the compensation committee to curb runaway executive compensation. We now have many more words in the proxy statement, but executive pay is still running away. If disclosure hasn’t accomplished much there, how can we assure that it will accomplish something here?

A smarter, more comprehensive move is to think about what we want boards to do in modern times, and craft their stated duties—in terms of committee structures, needed expertise, fiduciary responsibilities, professional skepticism, and the like—so that recruiting more women and minorities is a natural byproduct of that process anyway. It’s a more ambitious goal and harder to do, but offers a better way forward.

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