Large companies — those worth $5 billion or more — appointed nearly three times as many women as men to their boards of directors during the second and third quarters last year, showing just how eager they are to diversify their governance teams and comply with mounting pressure for equality. “The more women board directors a company has in the past, the more women corporate officers it will have in the future,” concluded a 2008 study by Catalyst, a nonprofit organization that promotes women in the workplace.
A recent Australian study confirmed this finding for companies listed on that country’s stock exchange. Diversity entrepreneurs have spread the gospel, and not only with regard to women. They hold that increasing the diversity of directors encourages companies “to be more open to hiring women and minority employees,” in the words of BoardEffect, a business-communications software company.
But a highly diverse board does not necessarily mean that the executives who run a company are — or ever become — truly diverse. In fact, the board frequently serves as a smokescreen to conceal just how white a company’s leaders (the CEO and his team) are.
The purpose of the board is to provide the chief executive with information on regulation, experience in major financial decisions, expertise on mergers and acquisitions and help setting long-term strategy. The board may meet a few times a year and be in contact more frequently, especially in times of crisis. Being a director is largely a part-time job, and it’s common for a member to sit on boards of a few different noncompeting companies.
Corporate directors have historically been white and male. Even as the country changed, the gender, racial and ethnic composition of the captains of capitalism largely didn’t. Eventually, regulators shifted from nudging firms to pay more attention to board diversity to taking a more aggressive approach. The Sarbanes-Oxley Act of 2002 broke up the old boys network by requiring more independent directors. In 2009, the Securities and Exchange Commission ordered companies to disclose in their proxy statements “whether, and if so how, a nominating committee considers diversity in identifying nominees for director.” Last year, California became the first state to require publicly held companies headquartered there to put at least one woman on the board by the end of this year or face fines.
When a company does turn out high director diversity, it’s frequently met with high-fives, awards dinners and bragging rights from several organizations because the corporation has demonstrated that it trusts a broader pool of talent to help steer the ship.
In my previous research, I studied the gender and racial mix of the executive officers — those legally responsible for running a firm on a day-to-day basis — of the richest 100 American companies by market capitalization. Every five years from 1995 to 2015, I noted the race, gender and ethnicity of the officers, following the same classifications used by the Census Bureau. (I checked my conclusions with the companies.) The average share of female and minority executives increased from 8 percent in 1995 to 24 percent in 2010.
Last month, I compared my research to the board diversity of those companies in 2015. Corporations have been faster to embrace diverse directors (who monitor management at a distance) than diverse chief technology officers, chief marketing officers, general counsels and the like (who manage the daily grind). Boards overall had higher diversity than executive-officer teams did. In 2015, women and people of color constituted nearly 36 percent of the average board among the top 100 companies, whereas they made up only 28 percent of executive officers.
Wells Fargo’s directors were the most diverse: Sixty-nine percent of them were female or minority. The financial-services company received high praise and awards for its diverse board from the ExecRanks in 2015 and DiversityInc in 2016. Yet its executive officers comprised seven men and three women, all white, in 2015. Over 20 years, Wells Fargo barely increased its diversity. In 1995, it had 10 male and two female executive officers, all white. The C-suite is still all-white today.
Johnson & Johnson had a remarkable 56 percent diversity score in 2015 for its board of directors, which included three white women, two African American men, one Hispanic man and five white men. Yet the executive-officer team consisted of five white men and one white woman. In fact, four of the top 10 companies with the most diverse boards had all-white executive officers — nearly twice the rate of all the companies studied. Racial segregation of top management teams was more prevalent in companies with the greatest board diversity. This occurred even though all-white officer teams declined overall, from 30 percent between 1995 and 2010 to 21 percent in 2015.
Nearly 43 percent of Morgan Stanley’s board was diverse, but its executives were all men: six whites and one Asian American. It was a common pattern: Eighty-two percent of the firms with all-male executive officers found places for women on their boards but not at the top of their management teams. (Since my study, Johnson & Johnson and Cardinal Health have racially integrated their teams. Aetna is now part of CVS Health.)
What’s going on here? The obvious explanation is that corporations have been quick to seize the public relations aspect of diversity. Most proxy statements now contain director candidates’ pictures in addition to biographies. Having a diverse group indicates the corporation’s open-mindedness, expansive view of the world and willingness to grapple with all its complexity. It signals that a firm embraces equal opportunity, which may mollify activist shareholders who vote for directors. Organizations compete to be selected as one of the top 50 companies by DiversityInc, the premier publication of its kind. Winners are invited to a celebratory Wall Street dinner, the firms are given free publicity on the DiversityInc website, and a report stacks them up against each other.
If a CEO values diversity on his board, why would he not foster it among the executive officers with whom he spends more time? Some studies have shown that diverse groups tend to be more creative and solve problems faster, but they also can have miscommunication and conflict. It may be easier for a chief executive to deal with greater dissonance among directors he sees less frequently than among colleagues he sees every day. In 2015, the final year in my study, 50 percent of the top 100 companies had either all-white or all-male executive officers, indicating the extent to which CEOs cultivated homophily in their executive teams.
Homogeneity can make communication easier and contribute to better performance on complicated tasks, suggesting that some chief executives prefer a team with whom he or she will feel more comfortable and trust to carry out the agenda. But it can also lead to groupthink and overconfidence. In addition, having a homogeneous executive team may signal to rank-and-file employees that the company does not actually provide equal opportunity.
The share of all-white executive teams dropped from 67 percent in 1995 to 33 percent in 2015. While this represents progress, it also indicates a stubborn racial characteristic among corporate leadership that has not been dislodged by measures such as diversity councils, affirmative action or board of director decisions.
The person at the center of both teams is the chief executive — who is, 60 percent of the time according to my study, also the chairman of the board, despite the effort of the Dodd-Frank Act of 2008 to encourage companies to explain this boss-with-no-boss position. In this dual role, the chairman-CEO oversees board nominations and executive-officer selections. He or she should have to answer for the diversity of both panels.
The SEC should require boards to integrate their diversity principles and practices into the appointments of executive officers. In reading proxy statements issued by the top corporations in 2015, I found that there was no mechanism described for boards to develop, foster or select diverse candidates for executive officers.
Until this chasm is closed — between the values that many CEOs and boards espouse and what they practice when it comes to executive officers — they will be seen as exploiting race and gender when it most suits them.