Thinking Through the Legislative Future of Board Diversity

Over the last two years, the United States has seen a state-level movement to legislate the composition of Boards of Directors. California, with Senate Bill No. 826 in 2018, is considered the first state to enact a Board quota: a requirement of at least one female on the Board of Directors for all publicly held corporations based in the state. Two years later, California furthered its movement with the passage of Assembly Bill No. 979: the same corporations as impacted by Senate Bill No. 826 are now required to have, “a minimum of one director [on the Board] from an underrepresented community.”

And California is not alone. As of May 2020, 11 states are considering legislation addressing Board diversification (albeit, all related to gender).

It might lead one to wonder: Is this just a fad?

We don’t think so, at least not in the short-term.

In some ways, the United States is late to the game on legislating Board composition. In 2003, Norway amended The Companies Act to require the representation of both males and females on Boards of Directors at the risk of governmentally-imposed sanctions (including dissolution of companies). This action has awarded Norway recognition as the first country to establish such regulatory guidelines. In the 17 years since Norway’s amendment, other countries have followed suit, with Germany being the most recent: in November 2020 the country passed legislation requiring that Boards be comprised of 30% female members.

We recognize that regulations in other countries generally do not impact companies in the United States. However, we do think this global activity will hold implications for companies at home, if for no other reason than it runs the possibility of requiring United States’ legislation to keep pace. As a result, we anticipate at minimum momentum within the country on the introduction and enactment of legislation that sets quotas for Board composition. In some ways, we even hope to see greater momentum (more on this later).

WHAT DOES THIS MEAN FOR YOU?

Regulations and legislation deemed unnecessary or statutorily unhelpful are cumbersome, at best, to abide by. Assuming our speculation holds true and more states (or even the federal government) enact Board quota legislation, how your company views these regulations will impact how successfully you comply with them. If there’s one thing we want to help our partners avoid, it is a strategy that does not allow you to comply with state and/or federal requirements. And we view your Board composition as part of your strategy. So let’s think through this together:

First, Diversity on Boards is beneficial. An (admittedly nonscientific) survey in 2013 identified ten ways in which Board diversity benefits companies. If, however, you are looking for something more robust, we offer this 2018 (more rigorous) analysis on the impacts of diversity on nonprofit Boards and this 2019 how-to-diversify article which includes a small meta-analysis on the topic.

In large part, diversity on Boards directly benefits a company. More diverse Boards, among other things:

• Attract a more diverse consumer base;
• Strengthen the Board’s fundraising capabilities;
• Increase the likelihood of paying dividends to shareholders;
• Result in more employee engagement; and
• Diversify how a company tackles recurrent and emergent challenges.

While we believe that diversification in terms of all demographics is important for companies, it is important to keep in mind that diversification is not identical across those demographics. What we mean is that impact and value of having more female-identifying Board members, for example, does not equate to the same impact and value of having more Asian American Board members or Board members identifying outside of binary gender identity. We make this note here because it speaks to the extreme nuances that result from Board composition and being aware of these effects will be crucial in your Board diversification work.

Second, Board composition is a strategy. We said it before and we’ll say it again: how you comprise your Board should be part of your overall strategy. While some of you, especially in the nonprofit world, may already have Board composition regulations in place (here’s looking at you, Federally Qualified Health Centers), others may be pulling from your networks to help fill Board seats.

The reasons behind how companies populate their Board are myriad, and any one individual decision on who to invite to join your Board is not problematic (save for ethical or legal implications). However, integrated into your business and strategic plan needs to be the holistic approach to filling out the composition of your Board of Directors.

Finally, Boards are not static. We have all had the experience of interacting with a Board that has largely remained the same year-after-year, decade-after-decade. And while there is something to say about the historical knowledge that comes along with long-serving Board members, retaining them at the cost of attracting new and diverse talent can often prove to be detrimental.

We recognize the challenges associated with attracting and retaining Board members; many of us at Atrómitos have had to do it! But Boards cannot retain their utility if membership is static. In fact, we could argue (and, in fact, are actively doing so right now) that diversity is a selling point for potential new Board members.

LOOKING AHEAD

As we stated before, we anticipate legislative activity on Board quotas to continue in the United States. Current activity primarily focuses on the gender diversification of Boards. Given the narrative arc of how fights for equality have played out in our country, this makes sense. However (obvious statement alert), gender is not the only source of diversity. As the movement continues in legislating how governance bodies stratify authority across demographics, we anticipate seeing more (but not all) identities included in quota requirements.

Does this mean we are predicting a body of legislation that prescribes exactly who can and cannot be on a Board? Not exactly. Nor do we think the legislative infrastructure of the United States able to survive such a prescription. In fact, we hope it doesn’t need to come to that. If you read any of the resources thus far on the impacts of Board diversity, we hope one thing has stood out: there is still so much we don’t know about how diverse leadership impacts company performance. Why? Well, we just haven’t been doing it that long.

This gets to our point: you can get ahead of a legislative movement to diversify your Board by building your own movement to do so. By proactively working to strengthen the performance of your company by diversifying your Board, any forthcoming legislation should be a, “nice to know” and not a, “now what do we do?” And when you work on your diversity strategy, throw open your doors to all regardless of age, gender, race, ethnicity, sexual identity, gender identity, ability, etc. While your Board will not represent every demographic, starting from a place of inclusion means you are more likely to attract those that need to be there.

On a closing note: we at Atrómitos are in this with you, our partners. As a certified woman-owned small business, we are committed to figuring our place in the diversity landscape and discussion; and we recognize we still have work to do. But we hope you will help do the work with us.