Small-cap board diversity lags S&P 500, Morningstar says

Mar 04, 2019
Pressures driving female representation at larger companies are weaker among smaller firms, according to report

Gender diversity in small-cap boardrooms is lagging behind that found among the S&P 500, Morningstar states ahead of International Women’s Day on March 8.

In a recent post, Morningstar presents data showing that the disparity in board gender diversity by company size appears to be increasing. The gap between average levels of female representation on the boards of S&P 500 companies and those at the remaining companies in the Russell 3000 is growing, from 5.4 percent in 2009 to 8 percent today.

Public companies headquartered in California must have at least one woman on their boards by the end of 2019. By 2021, if a board has five directors, then two must be women; and three must be women if there are six or more directors. But highlighting the lack of diversity at the smaller end of the scale, Morningstar cites a Board Governance Research finding that 53 percent of micro-caps in California have no female directors.

‘Whatever pressures are driving female representation at the upper end of the market-cap range, they are much weaker at the lower end of the range,’ Morningstar states.

‘In 2018, several reputable research organizations applauded the increased diversity of corporate boards, with women holding a quarter of Fortune 100 board seats and filling more than a third of new seats,’ Morningstar notes. But looking deeper into the numbers reveals a picture that is not as encouraging as it might seem – particularly as you go down in market cap, it adds.

‘Likely this is due to less attention being paid to smaller-cap companies,’ Madison Sargis, Morningstar associate director of quantitative research and report author, tells Corporate Secretary sister publication IR Magazine. ‘Small to micro-caps have fewer analysts to scrutinize corporate governance processes while smaller companies also tend to have smaller boards so there are fewer available positions.’

Morningstar also finds that overall, female board members tend to be more likely than men to sit on multiple boards. According to the firm, nearly one quarter (24 percent) of women sit on more than one board in the US, compared with only 17.9 percent of men.

‘While small, the finding is significant and carries important implications,’ Morningstar states. ‘The value of gender-diverse boards comes in having a diversity of opinions and what this means for the quality of corporate leadership. At a market level, if increasing board gender diversity just means hiring the same women onto more boards, there is no net increase in diverse perspectives in the market for board leadership.

‘Furthermore, with the increasing demands on board directors, over-boarding is a red flag that many governance advocates raise with respect to directors who hold three or more board positions.’

‘[B]oards cannot become more gender-diverse unless the available talent pool does, too,’ Sargis says. ‘When a search firm recruits for a new board position, it typically requires prior board experience or senior management experience,’ which essentially turns out to be a ‘self-selecting process,’ she adds.

‘Female candidates meeting the traditional standards are a rare resource,’ Sargis says. ‘Women make up only a fraction of public company senior management positions and existing board positions. As a result, corporate boards are selecting from the same, small population of female executives and existing board directors.’

A ‘troubling trend’ is that, unlike the push to accelerate the percentage of women on boards, the representation of women on executive teams is barely increasing, further restricting the future talent pool. ‘Increasing female representation on boards does not begin and end at the top; it starts within the workplace,’ Sargis says. ‘Companies must be actively supporting women throughout their careers, so they can advance into senior roles.’

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