Board Diversity Disclosures Increase, But Diversity Overall Needs Improvement

Female directors have begun to make inroads in boardrooms, but racial and ethnic diversity remains a challenge.

More companies are disclosing the gender and racial makeup of their board of directors, according to a recent report. While gender diversity is increasing faster than racial and ethnic diversity on publicly traded boards, neither is progressing at rates diversity advocates would like. With more companies showing a willingness to disclose board composition, boards may have a more difficult time resisting shareholders calls for more transparency on this matter during the 2022 proxy season.

The information on disclosures comes from The Conference Board report, “Corporate Board Practices in the Russell 3000, S&P 500 and S&P MidCap 400: 2021 Edition,” a collaboration between Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and the John L. Weinberg Center for Corporate Governance. According to the report, the percentage of female directors on S&P 500 boards in 2021 increased to 29.1%, up from 27.6% in 2020. In the Russell 3000, females represented 24.4% of board seats in 2021, up from 21.9% in 2020. The report also states that women represented about 38% of this year’s newly elected directors in both the S&P 500 and the Russell 3000.

Unfortunately, the data reported on racial and ethnic diversity is less encouraging. Since few companies have tracked data on the racial and ethnic makeup of their boards, it is hard to determine the true picture of board diversity among U.S. corporations. The Conference Board report shows tremendous growth in the percentage of companies that are disclosing data on the racial and ethnic makeup of their board, but much more needs to be done. As of June 30, 2021, 59% of S&P 500 companies and 26.9% of Russell 3000 companies disclosed information on the racial and ethnic makeup of their board. According to the report, “Among S&P 500 companies that disclose their directors’ race (ethnicity), 76.4 percent self-identify as white, 13.3 percent as African American, 5.3 percent as Latinx or Hispanic, and 4.1 percent as Asian, Hawaiian, or Pacific Islander. The remaining 0.9 percent report a different ethnic background from those listed above.”  Information on the class of new directors appointed in 2021 showed that “boards remain overwhelmingly white,” with 78.3% of directors white, 11.5% African-American, 6.5% Latinx/Hispanic and 3.1% Asian, Hawaiian or Pacific Islander.

The statistics from this report suggest that:

• Large companies (S&P 500) have been quicker to disclose information on board composition than smaller companies. Expect larger companies to continue to disclose board diversity data (if they haven’t already). Since board diversity is considered good for business by many institutional investors, companies are more willing to share this information with the public;

• A significant increase in gender diversity on boards—particularly involving white women—has been a major impact of the board diversity movement. So far, white women have been the primary beneficiaries of diversity efforts. Diversity advocates see this as a positive outcome, but not good enough.

• Improving racial and ethnic diversity on boards has been harder to achieve, as witnessed by very little improvement in the percentage of directors from racial and ethnic groups added to corporate boards. This suggests continued resistance to efforts intended to encourage board diversity. Expect to see more votes against the re-election of directors on boards that fail to diversify and more shareholder proposals asking for greater disclosure of board composition and other diversity-related data next proxy season.

• Boards will need to develop plans to improve their board diversity next year and be prepared to disclose those plans to shareholders if necessary as increased scrutiny around this issue ratchets up. Matteo Tonello, the report co-author and Managing Director of ESG Research at The Conference Board, advises boards to “start scouting for potential [diverse] candidates well before the year in which one of their sitting directors reaches retirement age.” Boards can also decide to increase the number of director positions as a way of diversifying their board composition profile. Committing to board diversity will require boards to do things differently than they have before.