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House Financial Services Committee Hearing on Board Diversity

House Financial Services Committee

“Diversity in the Boardroom: Examining Proposals to Increase the Diversity of America’s Boards”

Thursday, June 20, 2019

Key Topics & Takeaways

  • Recruitment: Akutagawa said firms need to seek different sources for candidates, and Martinez suggested requiring a diverse slate of candidates. Creary pointed out that many boards do not articulate their criteria well, and there is no broad consensus on why CEOs are so sought after. Lumbra added that boards need a disciplined process to identify what skillset is needed and where to find qualified candidates.
  • Inclusivity: Creary said that board members must be utilized for the skills for which they were recruited, and the chairperson must be committed to soliciting perspectives rather than dominating the boardroom in order for diversity to matter.
  • Reporting Requirements: Rep. Carolyn Maloney (D-N.Y.) discussed her bill, H.R. 3279, the Diversity in Corporate Leadership Act, and asked the panel if requiring companies to disclose the gender, racial, and ethnic diversity of their corporate leadership would help investors make more informed decisions and put more pressure on companies. All panelists replied that it would. Creary commented that it is important to know the numbers, as statistics motivate people to solve the problem. Creary explained that corporations are “leading the way” on this issue without government regulation, and much of the work has been done because firms have chosen to engage.

Witnesses

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters noted the lack of racial, ethnic and gender diversity on federal and corporate boards, saying that strong diversity is “critical” to competitiveness and ensuring customers of all backgrounds are served. She said that as America continues to become more demographically diverse, highly inclusive companies outperform their competitors. Waters explained, however, that despite the clear benefits of diversity and inclusion, white men control the majority of seats on corporate and federal boards, and women of color in particular have been largely excluded from participation. She said that although the percentage of women may be increasing, the raw numbers show that African Americans, Asian Americans, and Latina women still hold the fewest seats. She said the public must continue to have access to board diversity data, adding that diversity is one of the “best investments” companies can make.

Ranking Member Patrick McHenry (R-S.C.)

In his opening statement, McHenry said it is “extremely important” to increase the diversity of American boardrooms, calling it the “right thing to do” for U.S. economic interests. He explained that research has shown that diverse inputs garner better outcomes, and wider experience and perspective leads to better decision making and risk management. McHenry said that although progress has been made, there is much more work left to do.

Testimony

Chelsa Gurkin, Acting Director, Education, Workforce and Income Security Team, U.S. Government Accountability Office (GAO)

In her testimony, Gurkin discussed two GAO reports on diversity, “Strategies to Increase the Representation of Women and Minorities,” and “Federal Home Loan Banks: Steps Have Been Taken to Promote Board Diversity, but Challenges Remain.” She said that diversity in the workplace can help organizations identify and address risks and enhance the quality of decision making and problem solving. She said that women and minorities have fewer seats at the table when important decisions are made, and it will take decades for women and men to have equal representation. She noted that the GAO studies found three key barriers to board diversity: organizations not prioritizing diversity in board recruitment; organizations looking to the traditional CEO pipeline and overlooking other talent pools; and the low number of board seats that open every year. She also highlighted strategies to address these barriers, including requiring a diverse slate of candidates, recruiting from other executive roles or from academia, and boards strategically increasing their size as a tool for both increasing diversity and for succession planning. Gurkin noted that without “intentional commitment,” diversity progress would remain slow, adding that disclosure requirements would increase transparency and demonstrate this commitment to both shareholders and the public.

Luke Visconti, Founder and Chairman, DiversityInc

In his testimony, Visconti explained that DiversityInc is a business publication that annually ranks the top 50 companies for diversity. He noted that diversity is a persistent problem across all industries, calling it an “urgent issue.” He explained that the publication’s diversity ranking is open to any company with more than one thousand employees and takes a “deep look” at human capital performance, including supplier diversity. He noted that 5 banks were ranked in the 2019 top 50. Visconti said the lack of transparency in selecting board members is a hindrance and recommended that regulation “to ensure fair and equitable representation on bank boards would greatly benefit our nation.”

Ron Lumbra, Managing Partner, Heidrick and Struggles

In his testimony, Lumbra said the total share of women and minorities on boards is still “quite low” and progress has been slow. He explained that there is low turnover on boards, with most boards adding a new director every 18 months on average. Lumbra also said that there is a demand for CEO experience on boards, but the pool for Fortune 500 CEOs is not a diverse one. He also explained that boards tend to bring on people already in their networks, which does not contribute to diversity if those networks are not diverse. Lumbra said that there has been recent progress, and pointed to a number of helpful practices, including board assessments to address key competencies and skills needed, opportunistically expanding the size of boards, and casting a wider net beyond solely CEOs. Lumbra said that having a disciplined, process-oriented approach requires patience and discipline, but can yield results.

Linda Akutagawa, Chair, Alliance for Board Diversity

In her testimony, Akutagawa said that “what gets measured gets done,” and that while the numbers tell a “significant story” there is still much work to do. She said that while the number of available board seats has increased and the “pie is bigger,” advancement continues to be slow and boards do not reflect the changing demographics of the country. She explained that research has shown that Hispanic representation has grown the least overall, and Hispanic women had the lowest number of board appointments from 2016 to 2018. She also noted that Asian Americans still occupy less than four percent of total board seats. She said African American men have the highest “recycle rate” in Fortune 500 companies, and Asian women have the highest in Fortune 100 companies, meaning the same person serves on multiple boards. She said it is important to ensure boards do not become complacent, as boardrooms need the best that diversity can bring.

Ambassador Vilma Martinez (Ret.)

In her testimony, Martinez said that Latinos in the U.S. total nearly 59 million, or 18 percent of the population, and are projected to add 1.2 million people a year until 2060. She explained that despite this strong talent pool that is driving job creation and growth, U.S. Latinos are an “untapped asset” in the corporate boardroom and continue to “lag behind,” with Latina women holding less than half a percent of board seats. She said disclosure is an important step and will help investors make informed decisions, as diversity is part of good corporate governance.

Dr. Stephanie Creary, Assistant Professor of Management, Wharton School of Business, University of Pennsylvania

In her testimony, Creary explained her research on board diversity, which showed that “culture matters” and concentrating on just one form of diversity “isn’t enough.” She said her research suggested there has been progress on gender diversity but not other metrics, and that there are concerns about “tokenism” and “checking the box” rather than thoughtful approaches. She recommended that boards broaden the range of backgrounds they consider beyond the standard CEO and CFO pools and ensure the necessary skillsets and expertise are represented. She added that diversity “doesn’t matter” as much if board member perspectives are not regularly solicited or valued and is more effective if the board culture is collegial with open communication.

Question & Answer

Recruitment

Waters asked about steps firms are taking to improve recruitment. Akutagawa said firms need to seek different sources for candidates, and Martinez suggested requiring a diverse slate of candidates. Creary pointed out that many boards do not articulate their criteria well, and there is no broad consensus on why CEOs are so sought after. Lumbra added that boards need a disciplined process to identify what skillset is needed and where to find qualified candidates.

Rep. Ann Wagner (R-Mo.) asked if having diverse interviewers leads to a more successful process, to which Creary replied that there is evidence that having an interviewer who has commonalities with the interviewee is important.

In response to a question from Rep. Frank Lucas (R-Okla.), Gurkin explained that the most critical component to effective recruitment is a commitment to ensuring greater representation. She said companies should look beyond the CEO pipeline, expand the number of board positions, and employ a continuous recruiting strategy even when there is not an open board position.

Rep. Scott Tipton (R-Colo.) asked the witnesses to comment on research that says jobseekers consider the diversity of a company and its leadership when considering whether to accept a job offer. Akutagawa replied that “if you can’t see it, sometimes you can’t be it,” explaining that having diversity among different ranks within a company is important and many millennials are “looking for people who look like them” when seeking job opportunities. Creary added that people are attracted to jobs at companies where people in positions of success look like them. She noted that being given access to a position does not mean a person will stay in it, and that it is important for companies to not only focus on getting diverse candidates in the door, but making sure people can contribute meaningfully so there is not a “revolving door.”

In response to a question from Rep. Gregory Meeks (D-N.Y.), Lumbra explained that there is currently a strong preference for board candidates with previous director experience, and “first timers” have a more difficult time. He encouraged boards to consider bringing on first-time candidates and providing mentorship. Lumbra commented that many executives are trained to be leaders, not directors, and exposing executives to governance issues before joining a board makes them board ready.

Inclusivity

Reps. Frank Lucas (R-Okla.), Barry Loudermilk (R-Ga.) and McHenry asked about inclusivity on boards. Creary said that board members must be utilized for the skills for which they were recruited, and the chairperson must be committed to soliciting perspectives rather than dominating the boardroom in order for diversity to matter.

Rep. Alma Adams (D-N.C.) asked about best practices for retention. Visconti replied that resource groups and mentoring that is structured and accountable provide people with the tools they need for success and are an avenue to share ideas and information.

Reporting Requirements

Rep. Carolyn Maloney (D-N.Y.) discussed her bill, H.R. 3279, the Diversity in Corporate Leadership Act, and asked the panel if requiring companies to disclose the gender, racial, and ethnic diversity of their corporate leadership would help investors make more informed decisions and put more pressure on companies. All panelists replied that it would. Creary commented that it is important to know the numbers, as statistics motivate people to solve the problem.

Reps. Andy Barr (R-Ky.) and Wagner expressed concern about the burden of regulation. Creary explained that corporations are “leading the way” on this issue without government regulation, and much of the work has been done because firms have chosen to engage. Rep. Rashida Tlaib (D-Mich.) asked if there are trends in companies sharing their diversity information on public websites. Lumbra responded that public sharing practices are not consistent; some you can view and “some are hidden.” Gurkin noted that though the GAO’s studies did not look at company websites, in discussing sharing such information with investors they found that the most powerful force of change has been demand from shareholders.

Accountability

In response to a question from Rep. Sylvia Garcia (D-Texas), Visconti said that “accountability drives results,” adding that if a CEO or board chairman is holding people accountable, that’s when numbers change. Asked by Lucas how the diversity of board participation in the financial services industry compares with other industries, Visconti said that it is a common problem “across the board.” He said the top 100 banks are average among other industries in terms of board diversity, and the top 10 banks are performing slightly above average.

For more information on this hearing, please click here.