Part Two of Two Parts
The TakeAway: Can Diverse Boards Avoid Pitfalls of Directors Spread Too Thin, And Enhance Performance?
Yesterday we described the Mad Men effect on corporate boards sorely lacking gender diversity. Today, we continue our discussion, placing it within the context of newly mandated disclosures on board diversity by the SEC (which neglects to define the term) and multiple memberships, as well as The Corporate Library’s new report linking board diversity with performance.
On Saturday, the New York Times covered the growing number of university presidents serving on corporate boards since the early 1990s, when affirmative action pressures (another old school term) opened the boardroom door—but only a crack. Last June, Bloomberg ran a similar piece: University presidents are safe choices, but shareholders remain skeptical about their effectiveness.
Case in point: the turbulence at Goldman Sachs, where Brown University President Ruth Simmons declined to stand for board reelection in May. Nell Minow, co-founder of The Corporate Library and friend of The Murninghan Post, told the Times that Dr. Simmons’ lack of financial expertise hurt Goldman Sachs. “That seat could have been held by someone who understood derivatives,” Minow said. “What we have learned from the financial crisis is that boards of directors have failed miserably in their No. 1 task of risk management. You don’t go on a board for networking, seeking contributions or working for minorities. You go on a board for one purpose — to manage risk for the long-term benefit of the shareholder.”
Meanwhile, last April investors at Marathon Oil cast 67.5 million votes against Rensselaer Polytechnic Institute President Shirley Ann Jackson following concerns about whether she had time to serve well. Shareholders at the other four companies on whose board she currently sits (FedEx, Medtronic, IBM, and Public Service Enterprise Group – she recently stepped down from NYSE Euronext) raised similar questions.
And multiple board memberships – also known as board interlocks – apply much more broadly than just to university presidents. Last Thursday, for example, the Wall Street Journal reported that venture capitalists sit on an average of 4.4 boards at the same time, and those numbers are rising—even as high as 20.
Far from benefiting shareholder value or society more broadly, multiple memberships and interlocking boards can reinforce elitism. The problem: Elitism narrows perspectives, while diversity helps expand them. Our society has wrestled with this conundrum for decades – C. Wright Mills wrote about in the The Power Elite back in 1956, two years after the Supreme Court decided Brown v. Board of Education.
Elitism’s downside remains the same today: With or without “diversity”, interlocking board membership tends to dilute board effectiveness at a certain point. Sitting on a few boards (with perhaps a couple of directors in common) can enhance a director’s experience and effectiveness; more than that, and the “biodiversity” of the board ecosystem suffers. This is why the SEC included multiple board membership, along with diversity considerations and other board matters ,in its recent Proxy Disclosure Enhancements, which took effect February 28.
Last Thursday The Corporate Library released an intriguing study called Beyond the Boilerplate: The Performance Impact of Board Diversity which takes a fresh look at the question (it’s available as a free download at their website). TCL’s Director of Research and Risk Analytics Kimberly Gladman compared companies’ statements with academic studies of diversity’s impact in the boardroom. Gladman’s academic review found that diversity increases the intensity of board monitoring and leads to more accurate value assessment. This helps companies focus on creating long-term value rather than short-term gains. When viewed from a broad market perspective of institutional investors, “diversity is likely to promote greater value creation in the economy”—a positive for long-term universal owners and governments that depend upon tax revenues from corporate profits.
So bring on diversity. Just one person, one seat, at a time.