Facebook Board Reignites the Debate Over Diversity

When Facebook conducted its IPO last month, a frenzied media assailed trading glitches, a large decline in the share price, and allegations of selective disclosure. But it was another distinction for the progressive technology company that had corporate governance watchers crying foul: it's all-male, all-white board of directors.

Facebook's less-than-diverse board is reigniting calls for more board diversity and sparking debate over the benefits of diversity on the board. Some are even wondering aloud if the time is right for regulations that mandate levels of diversity on the board as some countries, such as France and Spain, have adopted. At some companies, shareholders are filing resolutions to mandate more diversity.

The board of retail chain Urban Outfitters, for example, which also lacks any women or racial minorities, faced a shareholder resolution for the second consecutive year. The resolution, filed by socially responsible investment firm Calvert Investment Management, asked the company to explicitly consider diversity in its board nominating process, expanding the pool of candidates, as necessary, to include women and minorities. The resolution also directed the company to periodically review its board's composition to ensure that it continues to be diverse.

The resolution earned 39 percent of shareholder support this year, up from 22 percent in 2011. “This high vote count should send a strong and clear signal to management,” said Aditi Mohapatra, strategic initiatives manager at Calvert. “Increasingly, shareholders are acknowledging the strong business case for board diversity and expect companies to respond.”

Shareholder activists aren't the only ones who are pushing for more diverse boards. The Securities and Exchange Commission in 2009 adopted amendments to its disclosure rules, part of which required that boards consider diversity in identifying director nominees.

Barbara Franklin, president and chief executive officer of consulting firm Barbara Franklin Enterprises and currently a board member of Aetna and Dow Chemical, says more companies are beginning to recognize the advantages of having diverse viewpoints on their board.

“The fact that the SEC has asked for disclosure about how boards view diversity helps, but I believe CEOs today are now seeing that a mix of skills, experiences, gender, ethnicity, cultures, and geography can enhance the understanding of issues and make boardroom decisions better,” Franklin says.

Eileen Kamerick, managing director and chief financial officer of investment bank Houlihan Lokey and a director of Associated Bancorp and Westell Technologies, agrees. The diversity of opinion garnered by bringing into a boardroom people who come from different backgrounds and different experiences “allows the board to have really robust and substantive discussion about the issues in front of them,” she says.

Slow Advances

While experts have touted the merits of a diverse board for eons, companies have been slow to put more women and minorities on the board. The number of women on Fortune 100 boards only grew by 1.2 percent from 2004 to 2010, according to a study by the Alliance for Board Diversity, and the percentage of minority men actually declined by 2.8 percent during that period.

So why haven't boards embraced a greater level of diversity? The problem is self-inflicted, says Franklin, a former U.S. Secretary of Commerce.  “Sometimes there is real resistance to the idea of diversity—often silent resistance—because there are board members who don't want to deal with this type of change.”

Another barrier is that companies tend not to look beyond their usual networks for candidates. “If you look in the same place, you're going to find the same people year after year,” says Reatha Clark King, who serves on the board of Exxon Mobil and Lenox Group.

“The fact that the SEC has asked for disclosure about how boards view diversity helps, but I believe CEOs today are now seeing that a mix of skills, experiences, gender, ethnicity, cultures, and geography can enhance the understanding of issues and make boardroom decisions better.”

—Barbara Franklin,

President and CEO,

Barbara Franklin Enterprises

For example, it is no secret that former or current CEOs are the most highly prized candidates to sit on a board, but that's a very limited pool. Companies must start thinking more broadly about the expertise they need on their board and then look for that expertise beyond their usual network of sources, says King.

Board nominating committees may also set the bar higher for women and minorities. “They have to be realistic about the criteria that they're looking for,” says Ellen Richstone, who serves on the board of APC, BlueShift Technology, and Employment Resources. “It can't be harder than the screen they're willing to put up for their existing board members.”

There is no shortage of organizations that aim to foster diversity in the boardroom and offer boards lists of qualified candidates. These include Women Corporate Directors, Board Prospects, and Agenda.

“The talent is out there,” says Carl Taylor of management consulting firm Carl J. Taylor & Co. “Companies just have to work hard and find their commitment to making it happen.” Taylor adds that a lot of people who have served on boards are reaching retirement, which is another reason why companies need to expand their universe of candidates for board positions.

Last month, Corporate Board Member, a media and information company serving directors, launched a new initiative, “Moving the Needle: Building Effective Boards With Qualified Diverse Candidates,” aimed at increasing the number of diverse directors. The initiative will provide resources to help boards appoint more qualified diverse board candidates.

“We believe that diversity of thought gives corporate boards the best chance to be effective and ultimately fosters companies that are more customer- and human-capital focused,” says T.K. Kerstetter, president of Corporate Board Member. “While we do not believe that one-size-fits-all regulatory mandates or quotas are the formula for preventing fraud or successfully building shareholder value, we do encourage companies to take a proactive stance with respect to building diverse boards and address any governance issues like this head on.”

SEX PROXY DISCLOSURE ENHANCEMENTS RULE

Below is the SEC's explanation of how diversity is considered in the director nomination process:

The Commission amended Item 407(c)(2)(vi) of Regulation S-K to require disclosure of whether, and if so how, the nominating committee or the board (if there is no nominating committee) considers diversity in identifying director nominees. If the nominating committee or the board has a policy with regard to the consideration of diversity in identifying director nominees, then the amendments require disclosure of how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.

New Disclosure about Board Leadership Structure and the Board's Role in Risk Oversight

In addition to the new diversity disclosure in Item 407 of Regulation S-K, the Commission added new paragraph (h) to Item 407. New Item 407(h) will require disclosure about:

A company's board leadership structure, such as whether the company has chosen to combine or separate the chairman of the board and chief executive officer positions, and why the company believes the leadership structure of its board is the most appropriate for the company at the time of the filing;

A fund's board leadership structure, such as whether the chairman of the board is an "interested person" of the fund, and why the fund believes the leadership structure of its board is the most appropriate for the fund at the time of the filing;

If one person serves as both chairman of the board and chief executive officer, or in the case of a fund is an "interested person," whether and why a company or fund has a lead independent director and the specific role of such director; and

The extent of the board's role in the risk oversight of the company.

Source: SEC.

Board Quotas

So far, despite the limited progress on diversity many boards have achieved, many corporate governance experts disagree with boardroom quotas, such as the ones mandated in countries like Belgium, France, Italy, the Netherlands, and Spain. “If boards really focus on action, then I would hope that you can get there without quotas,” says Richstone.

“I would rather see government involvement limited and have an environment where we establish these needs through self-regulation,” says King. “I strongly believe that boards not only have the power and the responsibility, but they have the talent and skills to become diverse.”

The problem is that boards need to be intentional about it. “I don't think we need government intervention to move boards away from complacency,” King adds. “We need more board-member-to-board-member advocacy.”

“Diversity is of value to boards, and the numbers of women and minorities in boardrooms will indeed rise,” says Franklin. “I do believe this will happen more rapidly over the next decade.”

To achieve this goal, the National Association of Corporate Directors announced last month that it has formed a Blue Ribbon Commission on diversity to discuss the benefits of boardroom diversity, the barriers that exist, and action steps to advance more participation by women and minorities. Franklin, who chairs the NACD, says the Commission plans to release a report in October.