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Corporate Boards Getting Whiter While America Is Not

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Note: On Thursday, July 28, the Alliance For Board Diversity announced that it had updated and revised its 2010 Board Diversity Census, "Missing Pieces: Women and Minorities on Fortune 500 Boards." A corrupted data file skewed results when the study was initially published in May. The study's major findings remain unchanged. However, the numbers of white and black men that sat on Fortune 500 corporate boards were adjusted. The number of major companies with at least one board member from each of the major ethnic groups tracked by the U.S. Census was also changed. These updates are now reflected in the story below.

White men's already dominant control of the boards that oversee the nation's largest corporations widened during the last six years, according to a new report issued by the Alliance for Board Diversity.

In 2004, white men held 71.2 percent of board seats associated with the nation’s Fortune 100 companies. By 2010, that figure had decreased slightly to 69.9 percent. During that same period, women gained 16 board seats—with 5 occupied by minority women. But, that growth represented a just 1.1 percentage point increase for women on corporate boards over 6 years. (When the study was initially published, the census indicated that white men held a larger share of the nation's Fortune 100 company board seats and women of all races a smaller share of corporate board seats. White men did gain seats on corporate boards, but not as many as initially reported in the census.)

When the alliance broadened its research from the Fortune 100 to include Fortune 500 companies, it found that there was not a single Latino female board chair of a Fortune 500 company in 2010.

"The good old boys network is continuing to work," said George Herrera, a member of Windham International, Inc.’s board and a former director of the Cendant Corp. Hererra is Latino.

Also, just 26 of the nation’s Fortune 500 boards include at least one member of each of the major ethnic groups tracked by the U.S. Census. (The census initially reported that a smaller number of companies met this criteria.)

The pattern raises questions about corporate America's commitment to diversifying corporate boards and the efficacy of decades-long efforts by advocacy groups to reshape them.

“There are all kinds of excuses,” said Deborah M. Soon, a senior vice president of strategy and marketing who oversees the executive leadership initiative at Catalyst, a New York-based nonprofit that provides information about creating workplaces that enable women and their employers to succeed and is part of the alliance that produced the report.

“It’s too hard finding women. It takes too long,” said Soon, an Asian woman, describing the usual excuses for the lack of corporate board diversity. “But, there are cultures and norms that permeate corporate America today and continue to stand in the way of greater board diversity.”

Some companies and financial analysts have questioned the business value of board diversity. A 2007 Catalyst study examining corporate finances between 2001 and 2004 –- a period of boom and bust –- found that companies with women on their boards outperformed those without women in several key ways. Among the study’s findings: Fortune 500 companies that ranked in the top 25 percent for female board member inclusion produced on average a 53 percent better between return on equity, a 42 percent difference in profits, and a 66 percent difference in return on invested capital when compared to companies with the least gender-diverse boards.

This month, the nation’s two largest public pension plans developed a database where companies invested by the plans can find a diverse and qualified pool of potential board candidates. The two funds spent about $120,000 on the database, said Wayne Davis, a spokesman for one of the two California public employee plans. The funds expect to make their money back in subscriptions to the database.

The benefits of board diversity extend well beyond stock prices, said Arnold Donald, president and CEO of the Executive Leadership Council, a Virginia-based organization with nearly 450 mostly African American corporate senior executive members. The council is also a part of the Alliance for Board Diversity.

Companies need more diverse boards so that they can better understand the interests, concerns and experiences of their increasingly diverse clients and customers. Diverse boards are more likely to come up with ideas that expand sales and distribute corporate philanthropic dollars to address a wider variety of community needs said Donald, who is African American.

“If the lay person will think about any experience they may have had where there was a very diverse group of thinkers at the table,” said Donald. “That diversity probably brought more creative, dramatic and impactful ideas and solutions. A diverse group of people are simply going to have a different understanding of events, demands and needs.”

While working as a senior executive at Monsanto, Donald assigned a diverse team to the effort to get Environmental Protection Agency clearance for a new herbicide. A group had been working on the project for 17 years. The diverse team sought and won approval in less than a year, he said.

In the last decade, 98 percent nation’s population growth was due to increases in the black, Latino and Asian populations. Together, women, racial and ethnic minority men already comprise 66 percent of the nation’s population.

“I think what’s happened is that a lot of these companies are not in lock step with understanding the changing demographics [of the country],” said Herrera. “When there is a resignation the CEO typically looks within the board to try to get a recommendation so only about 48 to 50 percent of fortune 500 companies even use a search firm.”

Right now, there are nearly 900 Fortune 1000 companies that do not have a single Latino member of their board, said Herrera. Among Fortune 100 companies, only half have a Latino board member. Latino population growth outpaced that of any other group over the last decade.

“When you are sitting here and hearing the Census numbers,” said Herrera, “and the explosion of the Hispanic community and the size of its spending power you realize that we are driving the profits and revenues of a lot of these companies. I think we have to ask if I am good enough to buy your products in services then tell me why I am not good enough to sit in your board room.”

In the six-year period that the alliance study examined, many corporate boards became less diverse for a variety of reasons ranging from ordinary inertia, to a handful of retirements by just a few people of color serving on multiple boards, said Donald. Then, Donald said, there are the unintended consequences of the Sarbanes-Oxley Act, accounting regulations instituted after the demise of Enron and WorldCom.

Sarbanes-Oxley set new standard for public company boards, management and public accounting firms making each of the groups more accountable for inaccuracies in corporate financial statements. It also requires boards to be made up of mostly independent directors and create an audit committee that includes at least one person with financial management experience. Companies that do not have such a person must explain why in proxy statements.

Donald believes that to find these people many Fortune 500 companies turned to the ranks of retired CEOs, CFOs and accounting firm executives. Because of historical hiring, recruiting and promotion patterns, these pools consist almost exclusively of older white men, Donald said.

The U.S. Securities and Exchange Commission did not respond to a request for comment about corporate board diversity or the impact of Sarbanes-Oxley.

One of the reasons for the mixed results in the alliance’s report may be that, since Sarbanes-Oxley, many boards have been reduced in size and have recruited more independent directors from the pool of retirees that Donald describes, said Lissa L. Broome, a professor at University of North Carolina School of Law who researches the issues of diversity on boards. Another problem may be one that, for years, passed as the solution to all types of discrimination: ignore or at least avoid talking about difference.

When Broome and her research partners interviewed corporate board members around the country about the issue of diversity, many of the people interviewed expressed confidence that board diversity is valuable but were unable to articulate specific ways in which it affected decision making or shaped outcomes.

“I think part of the problem is that people are very uncomfortable talking about race and gender,” said Broome, who is white. “Talking about that is not politically correct or may not feel that way for a lot of these directors.”

In February 2010, the Securities and Exchange Commission began requiring companies to include in their proxy statements information about how diversity factored into filling board vacancies. But diversity was not defined and the statements have, thus far, been vague, Broome said. To help companies find more diverse candidates, Broome maintains a database of individuals interested in serving on corporate boards that companies can use free of charge.

Herrera doesn’t believe that Sarbanes-Oxley is the reason for the decline in certain types of board diversity. While Herrera does have business experience, he has never served as the CEO or CFO of a major corporation. But, he is a member of Windham’s audit committee.

“I think companies have to be committed and aggressive in finding people who have the skills they need,” said Herrera. “We do exist, and, let’s be honest here, they do have the capacity to find us and understand us when they want to sell their products. Companies have to bring that same aggression to the table when it’s time to search for directors.”

Another part of the problem may simply be the way that some companies opted to weather the recession. Many companies retrenched and focused on protecting capital, said W.D. “Denny” Minami, an Asian-American who is also a North Star Financial Corporation board member and former director at Ashford Hospitality Trust, Inc. These companies looked for board members with contacts that would help the businesses simply maintain rather than identify or expand into new markets.

While American companies wrestle with the issue of board composition, Norwegian companies have already complied with 2008 rules ensuring women hold 40 percent of each public company’s director seats. Companies that did not comply risked being delisted from Norway’s stock exchange. Most met the deadline. A small number went private or reincorporated in other countries, Broome said.

“My sense is that that is never going to happen in the United States,” said Broome. “But, I’d sure like to see it threatened.”