Congress Pushes Board Diversity Law—More Pressure For Directors To Comply

The latest effort from Congress is not assured of becoming law, but it does show which ways the winds are blowing.

If public companies haven’t picked up on the business trend of diversifying their boards by now, perhaps they will now that Congress has again put forth legislation asking them to do so.

News reports this week reveal that Senator Bob Menendez (D-N.J.) and nine of his Democratic colleagues have reintroduced the Improving Corporate Governance Through Diversity Act which would require public companies to report the racial, gender, ethnic and veteran makeup of their corporate board and senior managers. The bill would create a diversity advisory group to study corporate diversity and submit annual reports to Congress as well as require that the SEC’s office of minority and women inclusion publish a best practices and compliance report to the commission every three years. Similar legislation will reportedly be introduced in the House of Representatives by Rep. Gregory Meeks (D-N.Y.).

The movement to diversify corporate boards continues to gain support. States have introduced board diversity legislation, institutional investors BlackRock, State Street and others have threatened to vote against boards that don’t diversify, financial institutions have said they won’t finance deals from companies without diverse boards and the Nasdaq stock exchange has threatened to delist companies that refuse to diversify their boards. Now Congress is weighing in. Boards should consider having open discussion about what board diversity might mean for current directors and for the company’s future growth.

This effort from Congress is not assured of becoming law, however. In a letter to the SEC, a dozen Republican Senators blasted Nasdaq’s proposed diversity rule, stating, “While we think America’s corporations benefit from boards that avoid groupthink and offer a diversity of perspectives, and commend firms that look to increase diversity among their boards, we do not think Nasdaq should be using its quasi-regulatory authority to impose social policies.” Getting Republican votes for this bill will be difficult.

However, if Republicans or anyone else really believes that diversity is a “social policy,” they are missing the point. Over the last five years, boards have had to deal with any number of disruptions to industry business models. Companies that have resisted this trend have paid the price in stock price appreciation, loss of market share or being run out of business. Business disruptions are not limited to technology advancement. Board diversity is a strategy advancement, and any board that believes it is only a social program is disregarding the full capabilities and potential of the America’s human capital.

All board diversity requires is for directors to be open-minded enough to realize that the current group of respected and smart people may not have all the answers. Adding different voices to the board will only mean that the debates about how to profitably move the company forward will be slightly different, perhaps with alternative arguments and solutions raised. In the end, the best ideas will be voted on and implemented, just as they are in a boardroom that is not diverse.

With state legislatures, federal regulators, institutional investors, financial institutions, company stakeholders and now Congress all suggesting that board diversity would be better for companies (and supplying data to support that conclusion), it’s beginning to look as if resistance to board diversity is rooted in an unwillingness to change course. Sure, many companies will craft a written reason why they believe they do not need to diversify their boards, but that won’t mean that they are doing what’s in the best interest of the company. In many cases they will be doing what’s in the best interest of the current board members — particularly in those instances where non-diverse boards have produced lagging financial results for years.

Consider this: would your current board welcome a board candidate who demonstrated that they were unwilling to accept the advice of state legislatures, federal regulators, institutional investors, financial institutions, company stakeholders and Congress? Would your shareholders welcome candidates like that? Is a board filled with individuals like that really what’s in the best interest of the company? It might be wise for boards that have not already done so to pick up on this trend.