Board Diversity: No Longer Optional

Richa Joshi is an ESG Data Analyst at Truvalue Labs. This post is based on her Truvalue memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Research finds correlation between board diversity and company’s financial performance

Several studies have established that there is a correlation between diversity and companies’ financial performance. In 2018, McKinsey’s report stated: “Diverse companies are 33% more likely to have greater financial returns than their less-diverse industry peers.” In another study, BCG reported that companies with above-average diversity at the management level generate 19% higher innovation revenues than companies with below-average diversity.

New laws and institutional investors put pressure on companies

In September 2018, California became the first U.S. state to pass a law like Senate Bill 826, mandating all public companies with executive offices in the state to have at least one woman on their boards by December 2019. Following the announcement, California companies added 68 new women on their boards, the highest among the 26 U.S. states analyzed by 2020 Women on Boards. Other U.S. states such as Massachusetts, Washington and others are following California’s lead on diversity (details on page 6). Along with the new laws, companies face pressure from institutional investors like Blackrock and State Street to improve the board diversity.

Diversity seen in ESG data: Comparing leading diverse firms and all-male board companies

Since 2001, DiversityInc, a non-profit, has been announcing annual results of its ‘Top 50 Companies for Diversity’ competition, which is a metrics-driven evaluation. Below, we looked at the top companies for board of directors and compared their scores in the category Employee Engagement, Diversity, and Inclusion (EEDI) to a set of companies which have an all-male board. The data shows that companies with higher female representation perform better with ‘above neutral’ EEDI insight score vs the companies with no women on their boards.

Performance in EEDI category reveals diversity gap between top performers and ‘No women on board’ companies: Big companies are more diverse than smaller ones

Source: DiversityInc, Truvalue Labs (data as of 20 August 2020)


Female board members reached 20% in Q3 2019; ethnic diversity at only 10%

This post explores one of the questions highlighted in our racial justice research brief—the diversity of corporate boards and management. Public companies have a way to go in this area, as shown in the graph below.

The graph shows the trend for women’s board representation for S&P 500 and Russell 3000 companies. In Q3 2019, a milestone of 20% women board representation was achieved and at the end of Q1 2020, only 7.1% of Russell 3000 boards were without a woman. However, the ethnic diversity for Russell 3000 only improved marginally from 8.4% in 2008 to a little over 10% in 2019. [1]

Women board representation for S&P 500 and Russell 3000: All S&P 500 companies have at least one woman on board at the end of 2019


Source: ISS Analytics

Diversity is in focus for stakeholders, as the EEDI category gains share of Truvalue Labs data

Truvalue Labs’ ESG data captures diversity-related news when companies in the Truvalue universe are mentioned. The data by the definition of the Sustainability Accounting Standards Board (SASB), is linked to Employee Engagement, Diversity, and Inclusion (EEDI) category.

Below you can find a chart that shows the volume of the EEDI category, which covers diversity-related topics. The COVID-19 pandemic and the recent racial injustice protests, as covered in previous research briefs, are demanding that companies up their game with regard to workplace diversity.

The #Metoo movement has also helped apply pressure to improve gender parity at work. Not surprisingly, an increasing trend can be seen over the years for the EEDI category’s impact percentage for all sectors regardless of the SASB materiality dimension. Services sector reached a peak at 2018, when the EEDI accounted for ~15% of the total volume. For 2019, the EEDI volume increased in absolute terms YoY, but the percentage increase was less when compared to the total volume.

EEDI’s category volume as percentage of total volume increased for all sectors since 2010

Source: Truvalue Labs Data

How does that look at the individual company level?

Below you can find selections of recent Spotlight Events, algorithmically detected key events that Truvalue Labs provides to clients via platform, data feed, and AI Insight alerts. Spotlight Events captured since May 2020 show the spreading significance of diversity both at the board and company management level, often embedded in company practices.

Spotlight events related to diversity since May 2020

  • Uber Pledges to Double Black Leadership at Company by 2025
  • Google commits $175 million to Black businesses and promises to diversify leadership
  • Manulife makes $3.5 million investment in diversity, equity and inclusion
  • AXA IM to expand its gender diversity voting policy for both developed and emerging market economies
  • RBC commits C$150 million to diversity push, aims for more minority executives
  • Publicis Groupe reveals US diversity data and allocates £40m to global improvement for black employees

Source: Truvalue Spotlight Event Data Feed

Diversity laws spread from Europe to California forcing companies to adapt

Diversity laws that mandate quotas for female board representation have been around for more than a decade. In 2003, Norway was the first country to pass a law that required publicly listed companies to have at least 40% of board seats to be held by women. Other European countries—France, Spain and Italy enacted similar diversity laws.  After almost 15 years, in 2018, California became the first U.S. state to pass a board diversity law, though it is currently facing court challenges. California was followed by Illinois, which passed a law in Aug. 2019 requiring companies to make additional disclosure on board diversity. Further, Washington is the latest addition to the list with its new board diversity legislation. Other states, like Hawaii, Massachusetts, Michigan, New Jersey are in the process of drafting similar laws to be effective in coming years.

Deloitte’s latest report analyzed 8,648 companies in 49 countries. It shows that Norway is at the top of the ranking, with 41% of all board seats (in Norwegian companies) held by women, followed by France (37.2%), Sweden (33.3%), with the U.S. lagging behind at 17.6%.

2020 Women on Boards found that the U.S. states where a diversity law was mandated or is in progress added more female board directors versus the states that did not make any such announcements. The graph below shows the number of women added in the past year in the top six U.S. states and the current female board representation.

California added 68 women on company boards to comply with the new law; Followed by Massachusetts where a new law is currently pending legislation 

Source: 2020 Women on Boards report

The regulations significantly contribute to promoting boardroom diversity; however, such laws will take time to break the mold. To ensure parity is achieved, companies need to challenge the traditional mindset and enhance board diversity beyond quotas set by law. The current dynamic economic and social environment poses new risks which demands diverse skillsets and experiences. A diverse board can be a key asset to respond to challenging times.

California diversity law—phase 1 ended; companies now prepare for phase 2

December 2019 marked the end of the first phase for California’s Senate Bill 826, and the results as shown below indicate that 47% of the companies did not disclose their diversity data as per the law. Out of the 330 companies that submitted a report, 48 did not comply and had all-male boards. Companies like Skechers, Heron Therapeutics and others added a woman director before the deadline, whereas others like OSI Systems, Inc. preferred to stay non-compliant. [2] Other big names which have women on their boards but did not disclose the data are Adobe, Gap Inc, Walt Disney, Gilead Sciences, and Cloudera. There are also a few names like A10 Networks, Veeva Systems that do not have female board members and also did not file the report.

The bill states that companies which fail to submit the report and those that do not have at least one female board member will be subject to a $100,000 fine and the fine will increase to $300,000 for each subsequent violation. California will also publish an annual report outlining the list of compliant and non-compliant companies. Along with financial fines, reputational damage will be an ongoing drag as regulator fines make headlines in a conspicuous demonstration of refusal to diversify.

Out of the 625 companies covered under the diversity law, 330 filed the diversity report, out of which 48 remained non-compliant

Source: California’s Secretary of State—March 2020 report

Phase 2, which has a deadline of December 2021, compels companies with five-member boards to have at least two female members and those with six or more directors to include three or more female directors. Most of the companies that remained unaffected by Phase 1 will now need to adjust their board composition by adding female directors to avoid the reputational damage. We demonstrate below a list of few selected companies which need to take action before the deadline to be in the compliant with the law or to face fines of $100,000 per missing woman board seat. In January 2020, Cisco, Intel and Netgear appointed a new woman director on board to reach the desired number of three or more to avoid the fines and reputational damage.

Firms that must revise board composition before December 2021 to remain in compliance with California’s new law

Source: Company Website; Truvalue Labs (data as of 20 August 2020)

Full research note on this topic includes analyses of diversity within timely ESG data for Accenture, SBA Communications, and WeWork

The full research item available at Truvalue Labs’ website includes analyses of diversity data captured within ESG data for several firms. The note also explores the concept of The Rooney Rule, the National Football League policy named after Dan Rooney, which is finding its way into the corporates’ hiring policy to improve diversity.


1Source: ISS Analytics, Equilar(go back)

2California’s Secretary of State—March 2020 report(go back)

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