Academic Study Examines the Best Way to Increase Gender Diversity on Corporate Boards

Nasdaq has asked the U.S. Securities and Exchange Commission to approve a new rule requiring companies listed on the stock exchange to regularly report on the diversity of their boards and have at least one woman and one director on the board from an underrepresented minority group. Under the proposal, companies that fail to meet the criteria or have a plan in place to get there could face delisting.

A new working paper of the European Corporate Governance Institute, written by scholars at Washington University in St. Louis, the University of Alabama, and Northwestern University, finds that shareholder influence is more effective in diversifying boards of directors than mandates by governments or financial organizations.

The authors find that recent investor-driven campaigns have significantly increased the number of women directors on U.S. public company boards. That study causes the authors of the paper to believe Nasdaq’s approach — in contrast to investor-driven campaigns — might only result in tokenism as found following some previous government interventions, including California’s law toward board diversification. It could result in a situation where “firms — and investors — don’t necessarily think the mandate is about improving shareholder value, and hence, they do the bare minimum to satisfy it rather than giving women real influence on boards,” said lead author Todd Gormley, associate professor of finance at the Olin Business School at Washington University in St. Louis.

Dr. Gormly notes that in 2017  the Big Three” institutional investors — BlackRock, State Street, and Vanguard — launched campaigns to increase gender diversity on corporate boards. These three asset managers have more than $15 trillion under management. The asset managers vowed to vote against director slates that were not diverse and did so on many occasions. Dr. Gormly reports that “the Big Three’s campaigns led firms to add 2.5 times as many female directors in 2019 as they had in 2016, accounting for almost half of the total 2016-to-2019 increase in gender diversity. There also was a nearly one-fifth decline in the number of U.S. companies with no female directors over this period.

The full paper, “The Big Three and Board Gender Diversity: The Effectiveness of Shareholder Voice,” may be accessed here.