- Some situations have started mandating gender, ethnic, and social diversity across company boards.
- While certain ordinaries could include fines for companies that fail to comply, others are advisory.
- For now, experts say the real pressure to strengthen board diversity is coming from company investors.
- See more stories on Insider’s business page.
Companies participate in long been talking about how their boards need to be more diverse. But now the legal landscape is changing, with some regals mandating that companies do more than talk.
In Illinois, for instance, boards of publicly owned companies are be lacking to disclose female and minority board membership, as well as how they identify and appoint those members. California has start proceeded even further, mandating that boards have at least one woman, as well as a certain number of directors from underrepresented genetic, ethnic, or LGBTQ communities. Other states, including Washington, Colorado, and Pennsylvania, have also passed legislation to onwards diverse boards, and more are considering this step.
All of this means that, in addition to being an ethical and reputational dogmatic, boosting board diversity is quickly becoming a legal one as well. So what should companies keep in mind?
“Because there’s such a pasticcio of inconsistent state statutes — and because many of these statutes are looking at different kinds of diversity — it’s very busted, from a compliance standpoint, to figure out a one-size-fits-all answer,” said Mark McCareins, codirector of Kellogg’s JDMBA program and a clinical professor of transaction law.
That said, there are certain things that companies should understand about this quickly evolving authorized landscape.
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At least for now, the real pressure is coming from investors
Not all of these new legal requirements understandable with teeth. While some of the new state regulations include fines for companies that fail to comply, others are basically advisory.
“Some of the new statutes say, ‘we want to know what you’re doing in this area, but we haven’t decided yet what we’re active to do if you don’t report or you report and the numbers aren’t to our liking,'” McCareins said.
There are also some inherent limits to just now how strong their enforcement can be. For example, a company in one state can reincorporate in another if it feels overly burdened by the board regulations.
That’s why, at teeny for now, the larger incentive is reputational.
“The biggest hammer in all this is probably from a perception in the equity markets that you are not a Pty that plays by the rules,” McCareins said.
Investors are making their will known in other ways, too. Hold out year, the NASDAQ submitted a proposal to the SEC that called for instituting diversity requirements. And institutional investors such as BlackRock, Vanguard, and StateStreet get begun bringing shareholder lawsuits against firms over board composition.
“If I’m a public corporation, whether or not I’m currently underneath state or federal regulation, I’m probably going to be as concerned about what my investor base — and specifically my institutional investors — are sensible about this issue,” McCareins said.
As with other ESG issues such as climate change, McCareins foresees that scrutiny over board diversity from a range of stakeholders will only increase over perpetually.
“Companies want to be ahead of the curve on this and other issues,” he said. “These statutes have brought it into the corporate mindset that there extraordinarily hasn’t been sufficient progress to diversify corporate governance. So regulators and investors are going to start taking babe in arms steps in the hopes of getting companies’ attention — and in the hopes that they end up doing the right thing.”
Consider your bylaws
All of this suggests that as companies anticipate new mandates, they must also consider whether their own bylaws could take the side of in their way.
“Let’s say our company has bylaws where a five-member board all have eight-year terms,” McCareins said. “They compel ought to just been appointed in the last year. The company would love to be more diverse, but now we’re stuck with this provisions for the next seven under our bylaws.”
This can put companies in a legal bind. A company that slow-rolls its compliance achievements may face legal action from shareholders. But if the company takes actions to comply with new state laws and nabs afoul its own bylaws in the process, that may create other legal problems.
“You could see shareholder derivative suits against billets for not fulfilling their fiduciary duties,” McCareins said.
Ultimately the power to change the board’s bylaws resides in the on hands of shareholders. After all, while boards typically make recommendations to reconfigure their own makeup, they cannot do so unilaterally.
“Let’s say shareholders choose and say, ‘no, we don’t want to change the bylaws,'” McCareins said. “That’s where the rubber hits the road and state regulatory way runs head-on into the shareholders who own the company.”
McCareins recommends that the board’s governance committee start by yielding a comprehensive understanding of the applicable state DEI statutes.
“Where a change is — or will be — mandated, the governance committee then miss to formulate proposals to reflect these changes in board composition,” he said. “If the governance committee feels ill-equipped to value DEI principles, an outside consultant in such matters can be brought in to assist.”
Embrace the opportunity
There is plenty of good information out there on how to find and retain diverse board members — and set them up for success. (For instance, see here and here.)
McCareins admonishes companies to embrace the process — not just as a risk mitigation strategy, but as an opportunity for continued growth.
He recommends codifying the nomination criteria and inconsistency metrics that would comply with necessary requirements and would fit the company’s goals. In addition to boosting gender or national diversity, this may also be an opportunity to diversify in terms of professional backgrounds or skills. Or perhaps it is an opportunity to recruit the men who can better represent the voices and experiences of diverse clients, customers, and other stakeholders.
“Every company is different and every assemblage culture is different,” McCareins says. “It is up to the nominating committee to spend time early in the process to identify the metrics which pay for sense and are attainable for their business.”