By: Lucy Paiste
Despite unprecedented progress for women in the workplace, at the highest rung of the corporate ladder, the status quo remains. Women now account for more than half of the college-educated workforce in the United States[1] and more than half of all currently enrolled law students.[2] Looking further up, however, progress is slower. In 2023, for the first time in history, female CEO’s outnumbered CEO’s named John.[3] Globally, women only occupy twenty percent of seats on corporate boards.[4] More educated women participate in the corporate world at higher rates than ever, but what explains deficient representation at the top?
Several challenges obstruct the long and winding road to gender parity. For example, directors are usually recruited from current board members’ networks (likely of the same demographic), so lack of diversity tends to stick.[5] Radical social changes in highly elite professional circles seems like an unwise horse to bet on. Another obstacle is the recent Students for Fair Admissions decision,[6] which has spawned legal challenges to diversity programs everywhere.[7] Anti-DEI-program sentiment has also calcified at the state level: in 2018 the California legislature passed SB 826, which required that by the end of 2021, the boards of all public companies headquartered in California[8] include at least one female director (more than one depending on the size of the board). The law was struck down as unconstitutional just a few years later, as a gender-based quota violated the equal protection provisions in the California Constitution.[9]
Back in 2003, Norway was the first country to pass a gender quota law to regulate board makeup for public companies operating within its borders. Following the reforms, researchers closely analyzed Norwegian firms and discovered a myriad of impacts. By 2008, once the quota was in force, companies did increase their number of female directors, from nine percent in 2003 to over forty percent in 2008.[10] Better than that, the absolute number of women on corporate boards rose by two hundred sixty percent.[11] Alas, during the relevant years there was an unmistakable growth of private limited firms and there were “less than [seventy percent] as many public limited firms in Norway” in 2009 as compared to 2001.[12] These trends indicate that in the years immediately following the announcement of the gender quota law (which only covers public companies), firms chose to organize or reorganize themselves privately.[13] Studies suggests that it was the cost of the gender quota law that drove firms to change their legal organization or incorporate in another country.[14] The Norwegian trailblazing reforms led to negative market reactions when the new female directors were seen as less competent, appointed only to meet quotas.[15]
In the United States, although the Securities and Exchange Commission (SEC) has not proposed a gender diversity quota rule, they have supported efforts. Publicly traded companies are subject not only to the SEC’s rules, but also to those of the exchanges on which they are traded. In 2021, Nasdaq proposed a rule that would require each listed company to publicly disclose its board makeup and, if their makeup is not diverse, explain why it does not have at least two diverse members.[16] The SEC supports the rule, but the chance of survival remains to be seen.
Critics argue that board diversity regulations are harmful for two reasons: 1) the belief that appointments should be solely merit-based, and 2) the threat of companies privatizing to avoid compliance with the rule. Often in debates, DEI initiatives are juxtaposed with merit-based hiring policies,[17] a false equivalence that only amplifies the acute exclusivity of elite positions. The myth goes that the threat of an unqualified board member, appointed solely to comply with draconian regulation somehow outweighs the risks of a board with a stunted, singular perspective. Also, not for nothing, the presumption underpinning this argument is that lack of merit explains the current gender disparity on boards; women are not yet qualified enough to be appointed to boards of directors.
The second potential harm, that companies will choose to privatize to avoid regulation (as happened in Norway), shifts the regulatory burden from firms to stockholders. This argument is framed as a classic David and Goliath; the David’s are middle-class investors whose rights to invest are usurped by Goliath, the administrative state, who squeezes companies at any cost. Realistically, Goliath might be the party reorganizing their corporate structure to avoid appointing only two diverse board members. Leveraging the threat of potential financial burdens to the middle class does not shed any light on the infeasibility of a diverse board.
Furthermore, appointing female directors may not be the financial burden that critics assume. Some studies found that once board gender diversity reached a “critical mass” gender-mixed firms outpaced completely male-run counterparts.[18] This means that while gender diversity on boards can negatively impact business performance initially, once women comprise about thirty percent of a board, the trend reverses.[19] Imagine the pressures of being the first so-called “diversity appointment,” in a room and it’s easy to see the value in robust diversity initiatives.
None of this is to say that corporate board rooms and officers should reflect demographics perfectly. It would be challenging for a firm with only three board members to have to reappoint two-thirds of its board. For precisely this reason, the Nasdaq rule allows for explanation, and a board that failed to appoint diverse candidates with logical reason has no cause for concern. Despite plenty of obstacles, DEI programs and diverse board appointments are well worth pursuing not only for increasing company value, but also to spare future appointees the continued humiliation of defending their own competence. Ultimately, burdens of gender diversity quota rules do not outweigh the benefits of robust disclosure and facilitating a variety of perspectives in elite spaces.
Lucy Paiste is a Staff Editor at CICLR.
[1] Richard Fry, Women Now Outnumber Men in the U.S. College-Educated Labor Force, Pew Rsch. ctr. (Sept. 26, 2022) https://www.pewresearch.org/short-reads/2022/09/26/women-now-outnumber-men-in-the-u-s-college-educated-labor-force/ [ https://perma.cc/4K6E-2B33].
[2] Jaline S Fenwick, See Her, Hear Her: The Historical Evolution of Women in Law and Advocacy for the Path Ahead, Amer. Bar Assoc. (https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-november/see-her-hear-her-historical-evolution-women-in-law/).
[3] Matthew Boyle & Jeff Green, Work Shift: Women CEOs (Finally) Outnumber Those Named John, Bloomberg (Apr. 25, 2023), https://www.bloomberg.com/news/newsletters/2023-04-25/women-ceos-at-big-companies-finally-outnumber-those-named-john [https://perma.cc/QW4S-SHBD].
[4] CS Gender 3000 Report Shows One Fifth of Board Positions Globally Now Held by Women, Credit Suisse (Oct. 19, 2019), https://www.credit-suisse.com/about-us-news/en/articles/media-releases/cs-gender-3000-report-shows-one-fifth-of-board-positions-globall-201910.html [https://perma.cc/UML9-98TA].
[5] Joann S. Lublin, Female Directors: Why So Few? Wall St. J. (Dec. 27, 2011), https://www.wsj.com/articles/SB10001424052970203686204577115403482415704.
[6] See Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll., No. 20-1199, 143 S.Ct. 2141 (2023).
[7] Lara A. Flath, David E. Schwartz, & Amy Van Gelder, The Supreme Court’s Affirmative Action Opinion Continues to Spawn Challenges to DEI Programs, Skadden (Dec. 13, 2023), https://www.skadden.com/insights/publications/2023/12/2024-insights/esg/the-supreme-courts-affirmative-action-opinion# [https://perma.cc/JQ72-ADNL].
[8] Importantly, the law concerns where companies are headquartered, regardless of their state of incorporation.
[9] Cydney Posner, California Appeals Court Reinstates Injunctions Against California Board Diversity Laws, Cooley PubCo (Dec. 5, 2022), https://cooleypubco.com/2022/12/05/injunctions-against-california-board-diversity-laws-reinstated/ [https://perma.cc/6WXJ-NXRT].
[10] Ahern, K. R. & Dittmar, A. K. The Changing of the Boards: The Impact on Firm Valuation of Mandated Female Board Representation. 127 (1) The Quarterly J. of Econ., 137–97, 138 (2012).
[11] Bøhren, Ø. & Staubo, S., Does Mandatory Gender Balance Work? Changing Organizational Form to Avoid Board Upheaval, 28 J. of Corp. Finance, 152–168, 2. (Mar. 20, 2014).
[12] Ahern & Dittmar, supra note 10, at 183.
[13] Id.
[14] Id.
[15] Glass Lewis, Gender Diversity In-Depth Report 20 (2021), https://www.glasslewis.com/wp-content/uploads/2017/03/2017-In-Depth-Report-Gender-Diversity.pdf.
[16] SEC, Order Approving Proposed Rule Changes to Adopt Listing Rules Related to Board Diversity, Release No. 34-92590 (Aug. 6, 2021) (specifically, at least one director who identifies as female and one who identifies as an underrepresented minority or LGBTQ+).
[17] Dana Hull & Bloomberg, Elon Musk Calls Diversity, Equity, Inclusion ‘Morally Wrong’ Propaganda Words for Racism, Sexism, etc.: ‘Changing the Target Class Doesn’t Make it Right’ Fortune (Dec. 16, 2023), https://fortune.com/2023/12/16/elon-musk-calls-diversity-equity-inclusion-propaganda/ [https://perma.cc/V6DH-6MSJ]. Elon Musk call DEI initiatives “morally wrong” propaganda for racism and sexism despite Tesla’s impact report which championed the company’s DEI program. Id.
[18] See Jasmin Joecks, Kerstin Pull, & Karin Vetter, Gender Diversity in the Boardroom and Firm Performance: What Exactly Constitutes a ‘Critical Mass’? 118 J. Bus. Ethics 61 (2013).
[19] Id.