From the April 2011 issue of Treasury & Risk magazine

U.S. Boards Lag in Diversity

Corporations' boards of directors in the U.S. are still overwhelmingly dominated by men, and vague regulatory requirements on diversity haven't had much effect yet, leaving it to investors to push for change.

A recent report from Governance Metrics International calculates that the percentage of female directors, at just over 12%, has barely budged in the last three years. In fact, says Julie Gorte, senior vice president for sustainable investing at Pax World, a fund company with $2.7 billion in assets, the latest sizable increase in female representation on U.S. boards occurred a decade ago following the meltdown of companies such as Enron and WorldCom.

"There was a lot of board turnover, replacements and in some cases additions, after [the Sarbanes-Oxley Act] was passed, and a higher percentage [of seats] went to woman," Gorte says. "Otherwise, the progress has been glacial."

Despite the inaction, there's considerable evidence that diversity, including gender, race and ethnicity, actually benefits the bottom line.

In a 2007 study, McKinsey & Co. looked at 89 European companies with the highest level of gender diversity and found their return on equity, operating results and stock price significantly outperformed those of their competitors. Another more recent study by the California Public Employees Retirement System (Calpers) found, "Companies that were in the top in terms of percentage of women on their corporate boards outperformed companies in the bottom quartile by 53% in terms of return on equity."

The Securities and Exchange Commission has started requiring that companies describe the skills and experience they mandate for directors, including whether the nominating committee considers diversity. But the SEC did not define diversity, and some companies' disclosures simply describe it in terms of skills.

Other companies apparently haven't gotten around to complying yet. Calvert Investments, which has more than $14 billion under management, examined S&P 100 proxies and found 31 made no mention of diversity, 25 made a general mention and 44 specified diversity in race and/or gender.

Other developed countries have done far more. Some, like Australia, have required more substantial reporting on gender diversity, while others, including Spain and France, have instituted gender quotas.

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