Board Diversity by U.S. Region

Brianna Ang is a Research Analyst at Equilar, Inc. This post is based on her Equilar memorandum.

Under SB-826, California became the first state to pass legislation to require that publicly traded companies have at least one woman on their board. Specifically, companies in California will need to achieve this by 2019. Starting in 2021, the required number of women on boards will increase based on the overall size of the board. For example, if a board has five directors, two of them must be women, and if it has six or more directors, three of them must be women. Companies that fail to recruit the requisite number of women will face a $100,000 fine for the first violation, and $300,000 for each subsequent violation. Women only make up 17.2% of directors on California boards. California only has an average of 1.49 female directors per Russell 3000 board, meaning that the average company in California will have to add at least one more female director by 2021.

As shown by the recent passing of SB-826, female representation on boards of directors has become increasingly important, and may even become a requirement for more companies in the future. It shows that companies value diversity and are more inclined to appoint women at the highest level of leadership. There have been numerous studies, such as those conducted by UC Berkeley and McKinsey, which have found that companies with female directors tend to have better financial performance, are more transparent in governance, and are more environmentally and socially responsible than those with all-male boards. Having a diverse board can also assist companies in recruiting top talent and improving customer orientation. In a recent study, Equilar looked into female representation on Russell 3000 companies’ boards in each state to identify any trends and variations between regions.

As evidenced by the figure above, the overall average number of female directors is less than two while the average percentage of female directors is 17.4%. Only eleven states have an average of two or more female directors on boards. Contrarily, only two states—Utah and Wyoming—have an average of one female director per board, which makes them the least gender diverse among all 50 states. Breaking down the country into regions allows for a more in-depth look at the division of female directors. When divided into regions, the Midwest has the highest average number of female directors at 1.9 per board, while the West and South, at 1.5 females per board, have the lowest average number of female directors.

Region Average Median Max
Midwest 1.9 2.0 6.0
Northeast 1.7 2.0 7.0
US 1.6 2.0 7.0
West 1.5 1.0 5.0
South 1.5 1.0 6.0

Although companies with all male boards outside of California will not be facing fines, they may start facing more difficulties when it comes to proxy advisory firms. Proxy advisor Institutional Shareholder Services Inc. (ISS) announced in November 2018 that they have a new voting policy that will penalize boards with no female directors starting on February 1st, 2020 after a one-year grace period. ISS stated that they “will generally issue recommendations against the election of the chair of the nominating committee, but on a case-by-case basis, the election of other directors who are responsible for the board nomination process may be impacted (for example, at companies with no formal nominating committee). ISS will also consider case by case any exceptional circumstances explaining the absence of board gender diversity.”

Women have gained a record number of board seats in 2018 as more companies are realizing the importance of recruiting female board members in the wake of a greater gender diversity push as well as some high profile fallouts from the #MeToo movement. According to Equilar’s Gender Diversity Index (GDI), which tracks gender parity on Russell 3000 boards, 35.9% of new board seats in Q3 2018 were filled by women. This makes it the fourth consecutive quarter that the GDI has risen. Looking back, in 2015, only 20.1% of new board seats went to women. However, despite the increase in female board membership, only 6.1% of all leadership positions on Russell 3000 boards were held by women in 2018, according to a recent Equilar report, Board Composition and Director Recruiting Trends. Lead Director is the most common leadership position for women at 9.1%, followed by Non-Executive Chair at 4.6% and CEO-Chair at 3.4%.

Though it remains to be seen what effect the passing of SB-826 has on companies, it has set a precedence for other states to push for gender diverse boards. Hopefully, this will lead to a greater push for board parity and an even deeper dive into diversity as a whole.

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