Should more states legislate for diversity?
California is the first state in the Union to pass legislation requiring companies headquartered in the state to include more women on their boards. While the U.S. is slow to adopt this trend, legislation combined with investor pressure can potentially change the face of corporate America.
When diverse people from different backgrounds and genders have a seat at the table, companies develop unique solutions to common problems that lead to more innovation and stronger financial performance.
Companies with gender diverse C-suite and board leadership have the best risk-adjusted performance when compared to homogenous leadership teams, just one of the reasons that California has introduced legislation targeted at companies with headquarters in the state to have at least one woman on their boards in 2019, and three by 2021.
Companies that don’t report board gender ratios or comply with the law will be subject to fines ranging from $100,000 to $300,000. New Jersey is likely to follow suit. Massachusetts, Illinois, Pennsylvania and Colorado have non-binding resolutions that encourage board diversity.
What a company does on a board is very reflective to shareholders and to the public and consumers – it’s much more than if our board is diverse, but if we’re participating in how the world is moving.
Countless studies make the case for diversity in the workplace, but just as people don’t always change overnight, neither do companies. Quotas mandated by legislation force the issue, and boards in Norway and Iceland, for example, have become more diverse as a result.
According to Institutional Shareholder Services, Inc., only 78 (11%) of the 689 California-based companies are compliant with the law’s 2021 requirements, with one-third of companies (217) needing to appoint at least one female board member by the end of 2019.
In the US, more women than men enrol in postsecondary institutions and earn degrees. Also, female labour force participation has largely increased in tandem with graduation rates. While diversity is about leveraging differences rather than similarities, it’s also about having a workforce that matches the population’s demographic.
“What a company does on a board is very reflective to shareholders and to the public and consumers – it’s much more than if our board is diverse, but if we’re participating in how the world is moving,” said Amanda Grant, Managing Partner of Third Street Partners.
“Diversity is part of the fabric of what a company does in terms of the market, its employees and shareholders,” said Catherine Banat, Institutional Portfolio Manager of RBC Global Asset Management.
While women control a large percentage of purchasing power and are a major percentage of corporate shareholders, activist investors have started to use their positions to evoke change within the companies that they invest.
State Street, for example, launched the Fearless Girl campaign, named after the statue that faced Wall Street’s Charging Bull, and as part of that campaign, voted against boards that did not meet its gender diversity criteria.
BlackRock, Inc., the world’s largest money manager, has also publicly stated that its portfolio companies should have at least two female directors on their boards. Additionally, Morgan Stanley created a framework for incorporating gender diversity into the analytics for investment decisions.
These are just a few ways that shareholders encourage companies to be more diverse, but the issue is not without its complications as firms also struggle with their own diversity issues.
Quotas Can Effect Worldwide Change
Legislation addressing equal employment and wages works to protect against the marginalisation of individuals where there’s a socioeconomic barrier, and affirmative action addresses discrimination of women and minorities. These laws tend to work more as a corporate tick-list since there are no metrics companies can use to measure performance.
Title IX has created the most opportunities for women and is one of the more significant champions of diversity. It’s a federal civil rights law that prohibits discrimination on the basis of sex in any federally-funded education program or activity.
The law has a broad range of protections for women and transgender students and is most known for how it’s changed women’s sports. Institutions must meet a metric to show that they’re complying with the legislation – the ratio of females to males in athletics has to be proportional to the respective enrolment numbers.
This law had immediate results, and today, because American women are able to compete in sports at such elite levels, Title IX has led the world in having teams compete against American women.
Managing without scalable quotas and metrics is a difficult task when it comes to diversity: looking around the room to figure out a group’s diversity is not the same as determining whether the data reflects successful performance. Unless people have a target to measure, they’re less likely to complete the activity.
“Legislation sets boundaries and parameters, but within those boundaries and parameters, the onus is on a woman just as it is on a man to establish their own success given that opportunity,” said Amanda. “The door’s open, but I have to be able to walk through it, to want to walk through it and to have the qualifications and skills to walk through it.”
About the author
Andrea Murad is a New York–based writer. Having worked on both Wall Street and Main Street, she now pursues her passion for words. She covers business and finance, and her work can be found on BBC Capital, Consumers Digest, Entrepreneur.com, FOXBusiness.com, Global Finance and InstitutionalInvestor.com.