The SEC and Diversity in the Boardroom: Commissioner Aguilar Speaks (Part 1)

As the representation of women continue to grow in colleges and universities, their numbers also rise in graduate programs.   Women in 2008-2009 essentially tied men in the number of doctoral degrees awarded, although the aggregate statistics hid some pronounced subject area disparities (women obtain only 22% of engineering Phds).  

In law, gender progress continues.   Women in 2008-2009 made up 44% of all law students and, in 2009, made up 32.4% of all lawyers.  They are also prominent business owners.  

In the population as a whole, the United States has continued to become more diverse.  Of the 300 or so million people, a majority of them are women.  Four states, including California and Texas, have a majority of minorities.  Estimates are that by 2042, the entire country will be a majority of minorities.

Given these numbers, the lack of diversity in corporate board rooms seems increasingly out of place.  In the US, approximately 14% of the directors are women, little more than one per board.  People of color have a slightly lower percentage.  The problem is not limited to the US but exists globally. 

Ostensibly, the dearth is explained by the lack of qualified candidates (most directors have executive officer experience and few women and people of color hold those types of positions) but that is an increasingly suspect explanation.  Given the demographic make up of the United States, it is simply untenable to argue that there are not enough qualified women and people of color to average, say, two on the boards of the largest public companies. 

The real explanation is the closed nature of the director selection process.  As we have noted often on this Blog, directors are nominated and vetted by the board.  They typically run unopposed.  Unsuprisingly, boards tend to self perpetuate, with little shift or change in diversity or background.  This is, in short, an example of market failure.

The need for diversity in the boardroom, as we have argued, is not about quotas or obligations.  It is about smart decision making.  CEOs need boards that will provide feedback and advice that needs to be heard before a decision is made.  Boards filled with directors, all of whom have the same professional and demographic background, are mirror image boards that are more likely to tell the CEO what he/she wants to hear rather than what he/she needs to hear. 

We were, therefore, pleased to see that Commissioner Aguilar gave a speech recently raising the issue of board diversity and the SEC's role in the issue.  We will discuss the speech in the next several posts.