Friday, December 13, 2019
Gender diversity in the U.S. corporate world is shockingly low. As The New York Times reported, fewer women run large corporations than CEOs named John. Boardrooms also lack diversity. While 86% of directors participating in PwC’s annual director survey stated they felt that women should comprise between 21% and 50% of the board, only 28% of Russell 3000 boards have more than one-fifth of their board comprised of women. Some U.S. boards do not even try to include women: 76 of the largest 1,500 Russell 3000 companies have not had any female directors in the past decade.
The investor community has made board diversity a recent point of emphasis. State Street, Vanguard, and Blackrock have all voiced their commitment to gender diversity, followed by recent support from proxy advisors. California has ventured even further, passing legislation that mandates specific quotas for women on Californian corporations. New Jersey and Illinois may soon follow suit. Diversity mandates, however, confront substantial legal, economic and societal challenges.
What if companies could advance gender diversity without explicitly regulating diversity at all? Our recent article, Board Diversity by Term Limits? forthcoming in the Alabama Law Review, explores how the use of director term limits can promote gender diversity in boardrooms, avoiding quota controversies altogether. While term limits have often been invoked as a tool to improve director independence and board oversight, they may be also effective in improving diversity. We demonstrate the negative correlation between incumbency and diversity to support our findings. Director turnover in the U.S. remains very low. Firms hesitate to force out incumbents, who typically believe they contribute to the firm in unique and essential ways. Furthermore, although perhaps not averse to the idea of hiring a woman, these leaders will eventually search among potential replacements for people whose skills mirror their own. The cycle self-perpetuates, locking women out of opportunities.
Our article explores this aforementioned connection between term limits and board diversity. Drawing upon quantitative data on director turnover in the S&P 1500 and qualitative data on S&P 500 firms with term limits, our research shows that firms experiencing higher board turnover have more gender diversity. A regression analysis of the S&P 1500 companies over the 2010-2016 period shown in Table 1 below depicts how a decrease in average board tenure correlates significantly with an increase in gender diversity. Conversely, a one-year increase in average board tenure results in a 0.24 percentage point decrease in female board percentage.