Diversity in Boardrooms: Careful What You Wish For
Liz | 05/30 at 10:53 AM
Do-gooders working to demolish “buddy-boards” in hopes of strengthening corporate oversight may have had just the opposite effect. As directors become more powerful and the entities they oversee more complex, activists and regulators have pushed for increased board diversity. Relevant know-how has often taken a back seat.
The result? Ellen Futter, the capable head of the American Museum of Natural History, is on the hot seat. Ms. Futter, along with the descendent of a legendary investor, and the CEO of Honeywell, composed the three-member Risk-Policy Committee for JPMorgan – the committee that might have stood in the way of the bank’s outsized short sales of credit default swaps. Oops.
This is not the first time critics have singled out directors as negligent in their oversight of our country’s troubled banks. At Citigroup and Bank of America, board members were tossed overboard in the wake of the financial crisis and replaced with people more likely to understand the banks’ challenges. In the case of giant Bank of America, only two members of its board had any banking background. That did not include Monica Lozano, publisher of Los Angeles-based La Opinion, or Patricia Mitchell, former PBS head.
Not to pick on women, but often it is the female board members who appear like fish out of water. This is no surprise. Over the past ten or twenty years, as corporations worldwide have been pressed to diversify the makeup of their boards, they have gone en masse after accomplished women, and particularly C-suite types. As a result, the relatively few women who belong to that exalted sorority are jewels in the diversified board crown – even if their success has been in unrelated fields.
Ruth Simmons, head of Brown University, was a long-time member of Goldman Sach’s board and Jill Conway, former president of Smith College, belonged to Merrill Lynch’s board. Those associations—and their credentials as board members—were widely questioned.
In the case of Ms. Futter, reports of a “London whale” would likely conjure up a possible new museum exhibit – not a destructive CDS dealer.
A study from search firm Russell Reynolds Associates found that almost half the women serving as directors for Fortune 250 companies worked in government, academia, law or the not-for profit world. Their enthusiasm for doing so is understandable; Ms. Simmons received over $300,000 in yearly director fees, and resigned from Goldman’s board with over $4 million in stock, nicely augmenting her academic paycheck. For shareholders, the value is less clear. In the case of Ms. Futter, reports of a “London whale” would likely conjure up a possible new museum exhibit – not a destructive CDS dealer.
I date the acceleration of board broadening (no pun intended) from l’affaire Dick Grasso, in which the head of the New York Stock Exchange was awarded $187 million by a compensation committee headed by his good pal Ken Langone. To good governance preachers, Grasso’s outsized pay to run a non-profit organization was a classic “buddy” board debacle. Langone and Grasso served on each other’s boards’ both were trustees of NYU; in short, buddies.
Grasso’s pay proved a tipping point. It followed on the heels of the Enron and Tyco scandals, which energized governance watchdogs and convinced many that clubby boardrooms provided little oversight of management. The resulting Sarbanes-Oxley legislation encouraged companies to increase the number and clout of independent directors – opening the boardroom door to outside influences.
Next came the push for diversity. Bowing to pressure from organizations advocating greater opportunities for women and minorities, the SEC passed a rule in 2009 requiring that U.S. companies reveal what role diversity plays in board nominations and assess the effectiveness of their diversity strategy. Regulators in Europe went even farther.
Many younger and inexperienced women were ushered into the board room; the firms’ performance, they concluded, took a beating.
Norway imposed a rule that 40 percent of publicly owned company board members must be female by 2005 (the deadline was extended to 2007). Facing heavy fines, companies, which had as recently as 1992 had only 3 percent female directors, recruited rapidly. Reportedly, some 300 board seats ended up occupied by 70 women. A University of Michigan group which studied the ruling reported that many younger and inexperienced women were ushered into the board room; the firms’ performance, they concluded, took a beating.
Studies from various organizations – Catalyst, which advocates for gender equality, the Wellesley Center for Women, and McKinsey—all point to benefits from having female directors. They cite improved financial performance and better decision-making processes.
For example, the Wellesley Center concluded that women “broaden boards’ discussions to include the concerns of a wider set of stakeholders…; they are more persistent than male directors in pursuing answers to difficult questions; and they often bring a more collaborative approach to leadership….” Other studies have reached less favorable conclusions. A 2010 paper by two Stanford Law School professors concluded, “The relationship between diversity and financial performance has not been convincingly established.”
Proving the merits of having women on boards – or bald people, or tennis players, for that matter (though I personally imagine the tennis angle is obvious)—is impossible. There are far too many variables that can impact financial outcomes. Each company is unique; choosing board members, like selecting the members of any team, is an art and not a science.
Russ Reynolds, the eponymous founder and now CEO of RSR Partners, has conducted countless board searches. He says the single most important attribute a director can bring to the table is compatibility with the CEO. He advises, though, that “Board members should be selected with a specific view towards the position they will occupy; get somebody who knows something about the subject.”
Women undoubtedly bring a different perspective and other valuable influences. Still, the goal is to collect a body of people who can protect the interests of shareholders by watching over the business. Ham-fisted quotas or other demands to include this group or that do not serve the interests of shareholders or management. And that is, after all, the point, isn’t it?