Gender Diversity on the Board: The US Falls Further Behind (And Why We Need Shareholder Access) (Part 2)

The real explanation for the dearth of women is the closed system for determining nominees for the board of directors.  As we have noted often on this Blog, shareholders rarely receive a choice when electing directors.  In all but a very small number of cases, shareholders are asked to vote on the slate of directors submitted by the board of directors. 

Given the plurality system of voting, these directors will automatically be elected.  If the company has a majority vote provision in place, directors not receiving the requisite majority will nonetheless likely remain in office.  They typically must submit a letter of resignation that the board may or may not accept.  So far the tradition has been for the board not to accept the letter.  In other words, the nominees submitted by the board are almost always elected.

Increasing diversity under the present system means inducing the board (specifically the nominating committee) to nominate more women.  The committee could do so slowly, increasing the number of women nominees as incumbents step down.  Or the board could do so quickly by expanding the size of the board and adding additional women.  Either way, the front line for gender diversity is the board of directors itself. 

Foremost, fiduciary duties, as usual, are not up to the task of ensuring greater diversity.  The highly deferential approach taken to board decisions in general means that state (read Delaware) law provides no meaningful obligation to examine director qualifications and consider whether diversity would improve the decision making process.  Thus, in City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281 (Del. 2010), the state Supreme Court more or less reaffirmed the board's broad discretion to determine the qualifications of directors. 

As a result, evidence indicates that in selecting people for the board, nominating committees do not invariably conduct a broad search.  They may rely on people known to the CEO or perhaps to others on the board.  As a recent study sponsored by the British Government described:

• almost half of the directors they surveyed had been recruited through personal friendships and contacts, only 4% had a formal interview and only 1% had obtained the role through answering an advertisement. We found no evidence to suggest that this has changed substantially in the intervening years.

Given the personal and non-transparent nature of the selection process, there is little room for outside pressure.  Nor does the market have much of a role to play.  Those who rely on the market might contend that inefficient boards (due to gender disparities) would suffer in the market place (capital would become more expensive) and would eventually go out of business. 

Putting aside that this in part depends upon the market for corporate control, something hobbled and rendered almost non-existent by the Delaware courts, the approach assumes that this factor would be sufficient to drive a company out of business.  Given all of the factors that go into an investor's decision about the purchase of shares, there is no evidence that board diversity is sufficiently influential to materially effect capital raising.