The Vaguely Written Rule That’s Letting Corporations Get Away With Staying Very White And Male

ThinkProgress

The United States only has one requirement relating to diversity on corporate boards. But it’s so vague that employers get to fill in the blanks, and it’s unlikely to change the fact that boards remain overly filled with white men anytime soon.

In 2010, the Securities and Exchange Commission (SEC) put rules into effect that require companies to disclose information about the consideration of diversity in their proxy statements. It came after the Federal Glass Ceiling Commission, formed in 1991, argued that pushing companies to publicly disclose diversity information “motivates organizations to begin a process of positive social change” and that reporting “data on the most senior positions…is an effective incentive to develop and maintain innovative, effective programs to break glass ceiling barriers.” The group specifically suggested using the SEC for this purpose.

Publicly traded companies now have to report on whether they consider diversity when picking board nominees and if so, how. If a company does have a diversity policy, it has to describe how it’s implemented and assessed. But the SEC’s rule doesn’t define “diversity,” so firms are free to define it any way they please.

That vagueness means few are actually looking at gender and racial diversity. Aaron A. Dhir, in a chapter of his forthcoming book Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity from Cambridge University Press, compiled and analyzed proxy statements from the Standard & Poor’s 100 index between 2010, when the rule went into effect, and 2013. He found that only approximately half took diversity to mean gender, race, or ethnicity in any of those years. “Firms most frequently defined diversity with reference to experiential and related factors,” he writes.

Zeroing further in, he found that gender was referenced 47 percent of the time in 2010, 52 percent in 2011, 50 percent in 2012, and 52 percent in 2013. Race and ethnicity came up 45 percent, 50 percent, 48 percent, and 49 percent of the time, respectively. Age only came up about a quarter of the time. Only two companies, Bank of New York Mellon and Goldman Sachs, included sexual orientation in their definitions.

On the other hand, companies most frequently defined diversity as variety in experience or background. That’s how it was handled 83 percent of the time in 2010 and 88 percent of the time by 2013. Most of these were what Dhir calls “generic” factors such as “background,” “thought,” “personal attributes,” “perspective,” and “viewpoint.”

“The SEC’s decision not to define diversity left room for corporations to give the term content,” he argues. “That social identity categories were not more prominent in the disclosures serves as a preliminary caution that the SEC rule, in the future, may not produce diversity-enhancing results along socio-demographic lines.” In other words, because diversity can mean anything, the rule is not likely to prompt companies to bring on more women and people of color.

Companies are, for the most part, complying with the rule: in all four years, 98 percent had a description of whether the firm takes diversity into account. Just MetLife and Hewlett-Packard were noncompliant.

As he notes, however, “compliance does not necessarily correspond with active consideration of diversity.” He points to the example of Berkshire Hathaway, which fulfilled the reporting requirement by saying it “does not have a policy regarding the consideration of diversity in identifying nominees for director,” adding that when it picks nominees, the committee “does not seek diversity, however defined.” Few said they actually have a formal policy — just 8 percent. Most said they don’t have one a la Berkshire or were silent.

For its part, the SEC isn’t pushing very hard. Its enforcement mechanism is sending comment letters to companies about their proxy statements, but just 6 percent got such a letter about diversity in 2010 and none got one in the remaining years.

The rule seems not to be having much of an impact. Among Fortune 500 companies, women make up less than 17 percent of board directors, a figure that has stood still for eight years. Ten percent of companies have no women on their boards at all. Women of color fare even worse, holding just 3.2 percent of all board seats.

Other countries have taken a firmer stance and enacted gender quotas, starting with Norway in 2003, where women now hold 35 percent of non-executive board positions. Others at least have targets, like the United Kingdom’s 25 percent female goal by the end of next year, which has already spurred companies to select the highest number of women for their boards ever.

Increasing demographic diversity on boards isn’t just about equality. It’s also good business sense: multiple studies have found that the more women in leadership, the better the returns.