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Board Diversity Update

July 18, 2017

Conference Room

Board diversity is important for the evolution of organizations as they face potential disruptions. In particular, different types of diversity are needed to withstand a variety of challenges that companies may face moving forward. Diversity should be increased without compromising on the caliber and skill set of directors. Thus, boards should aspire to achieve a board composition that is both well-balanced and proportionate in terms of directors who have relevant experience.

Gender Diversity in Boards

Among the various diversity factors for boards, the one that is receiving the most push is that of gender diversity. Many investors are urging companies to make gender diversity a priority. However, a recent study by executive search firm Heidrick & Struggles reveals that numbers in this area for Fortune 500 boards may be declining. 

Key findings from the report include: 

  • The share of board seats that went to women in 2016 was 27.8%. This was a decline of two percentage points from 2015, and it also ended a seven-year run of year-to-year increases.
  • In 2014, it was projected that women would account for 50% of new board directors by the year 2024. In 2015, this figure changed to the year 2026 for projected parity with male directors. On account of the recent decline in the growth rate in 2016, it is now projected that parity will not be achieved until the year 2032.
  • On the other hand, 40% of new directors at tech companies were women. This is 13.5 percentage points higher than in 2015. This is striking, as the tech industry has often come under fire in recent years for the lack of women serving in senior positions and in board roles. Tech companies may be revamping their efforts to recruit more women board directors.

In a Deloitte Global report titled, “Women in the Boardroom: A Global Perspective,” senior managing director of Deloitte stated, “Organizations with women in the top leadership positions have almost double the number of board seats held by women. The inverse is true as well — gender-diverse boards are more likely to appoint female board chairs and CEOs. 

The Importance of Age Diversity

In addition to gender diversity, age diversity is another important factor for companies to consider when examining board composition. Younger board members typically have a greater ability to adjust to technological changes, and often bring with them fresh skill sets that can help bridge the gap in knowledge between them and older board members. 

Excluding the younger generation of leaders can negatively affect a board’s ability to create long-term value for the company, especially since technology and data evolve at a rapid pace. Typically, many older board members don’t have hands-on experience with digital and cyber issues like younger board members do. 

According to Egon Zehnder’s Global Board Diversity Analysis (GBDA), nearly 9% of all new board members appointed around the world since 2015 are under 45 years old. Among new female board members, 11% are under 45. The average board member is 65 — for female board directors, the average age drops to 58.

Thus, the data shows that most boards across the globe are still comprised of a majority of older members. The GBDA report sampled data from 1,491 public companies across 44 countries. 

New Disclosure Guidelines for European Companies

Besides specific diversity and inclusion factors, another important issue to consider is disclosure of board diversity policies. In Europe, the European Commission has adopted non-binding guidelines on the disclosure of non-financial information by companies. The objective of the guidelines is to help companies fulfill disclosure obligations that are set out in Directive 2014/95/EU (Directive on disclosure of non-financial and diversity information by certain large undertakings and groups). 

The Directive applies to large public-interest entities with more than 500 employees. Article 20, Section 1(g) of the Directive regarding corporate governance statements requires management reports to contain a description of the diversity policy applied in relation to the company’s administrative management and supervisory bodies. The description of the policy should include:

  • Aspects such as age, gender, or educational and professional backgrounds
  • Objectives of the diversity policy
  • How the policy has been implemented
  • Results in the reporting period

If no policy is applied, the statement must explain why this is the case. The Commission will continue to monitor the evolution of reporting developments in the EU, as well as globally. 

Additional Board Diversity Factors

Other dimensions of board diversity include:

These factors often interact with one another in complex ways. For instance, a focus on business experience may result in a decrease in gender representation, as women tend to have less CEO experience than men. As a whole, there is a general correlation between diversity on boards and high shareholder value. 

A more diverse board typically translates into a broader range of shareholder interests represented, as well as a wider talent pool on the board. The board will become a better reflection of the company's consumer base and employee population, and will be better equipped to meet disruptions and exigencies. The challenge is to incorporate clearer diversity policies while still meeting standards for merit and performance. 

Board composition should be determined by the fiduciary functions it performs in the context of the company’s overall business strategy. This is not a simple task, and may involve complex legal issues and policy determinations. If you have any questions regarding board diversity and other important governance matters, contact us today at Kessler Topaz. We have helped our clients implement effective and create board composition policies, and we tailor strategies to their unique circumstances.