Amid growing investor and government pressure for boards to increase levels of female participation, SEC commissioner Hester Peirce has raised concerns that the movement may have downsides due to effects such as cost and signaling.
In a speech to the Society for Corporate Governance’s recent national conference, Peirce acknowledged that boards taking a creative approach to filling holes are likely to look in new areas, and as a result are likely to increasingly recruit from previously underrepresented groups of people to get the necessary talent and expertise.
But she also outlined multiple concerns about the attention focused on women’s inclusion on boards. First, she argued that much of the rhetoric on the issue ‘overstates or misstates the research on the subject.’
Peirce told delegates: ‘To the extent that diversity of any kind improves a company’s ability to increase corporate value – by, for example, deepening the board’s understanding of its customer base or introducing new ideas that a more externally homogeneous board might have missed – it is an eminently reasonable issue for consideration by anyone interested in a company’s welfare.
‘I do, however, question a premise seemingly underlying many of these advocacy efforts: that the presence of women, without regard to what their qualifications are, is inherently salutary.’
The evidence is mixed as to whether simply including women on boards has a positive impact on a company’s performance, Peirce said. Some studies have found that having women directors has a positive effect on a company’s return on assets, but others have found no effect on performance, she told delegates.
Other studies see a positive effect on a firm’s compliance with ethical and social standards, and on monitoring behavior. ‘While in some instances, such improvements may result in a positive effect on the company’s financial performance, it is not clear that this is universally true for all companies at all times,’ Peirce argued. ‘Indeed, one study has found that increased monitoring behavior can be detrimental for companies that already have strong shareholder rights.’
Her second concern is that governmental efforts to dictate or push for particular board compositions improperly overrule private-sector decisions, and that ‘involvement of the federal government represents an improper federalization of corporate governance.’
At the state level, for example, California has introduced a law requiring public companies headquartered in the state to have at least one woman on their board in calendar year 2019. The law will also require companies to have at least two women on boards that have five or more total directors, and at least three women on boards of six or more directors in calendar year 2021.
The law is coming into effect even as recent research shows that technology and life sciences public companies in Silicon Valley are boosting the number of women directors on their board at a faster rate than firms in the S&P 100.
Peirce is concerned that state efforts to push diversity ‘micromanage an aspect of corporate governance that corporations, boards and shareholders seem perfectly capable of handling on their own.’ She adds that ‘the decision of who to place on a board is an intensely bespoke decision for a company. Optimal board size differs by company, but adding another director is not always a good option.’
COMPLIANCE COSTS
Third, Peirce said, external micromanagement of board composition imposes an additional compliance cost on being a public company. The number of public companies in the US has fallen in recent years, with some observers blaming in part the costs of compliance with regulations. SEC chair Jay Clayton is keen to encourage more companies to go public, and to do so earlier in their lifecycle.
‘With this in mind, new mandates on public companies that increase the costs of being public should be viewed with skepticism,’ Peirce said. ‘Smaller and younger companies may struggle to attract the best talent to their boards… Although many advocates of such mandates tout the benefits of expanding the pool of director candidates, if the company must have a woman, it will be just as limited as if it could only pick a man. Limiting companies’ choice increases their costs.’
In addition, drawing a comparison between baby-on-board signs used on cars, Peirce suggested that lady-on-board signaling may create an ‘unintended and inaccurate message – absent mandates, corporate boards will not recruit women.’
Her concern is that, unlike women, babies cannot take care of themselves and so the lady-on-board ‘movement could undermine the respect accorded to women who are in boardrooms.’
She added: ‘If women are presumed to be in the room simply to get the company credit, will their male colleagues listen to them? If the criterion is only that the director be a woman, will companies simply pick the same handful of women over and over again?’
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
