Wendy Gerwick Couture: Board member diversity matters — in Idaho and elsewhere

Associate professor at the University of Idaho College of Law in Boise and teaches business and commercial law courses.February 19, 2014 

One of the hottest topics in corporate governance is the effort to diversify public companies’ boards of directors, with respect to gender, race and ethnicity.

Federal regulators are involved. In 2010, the Securities and Exchange Commission adopted new rules requiring public companies to disclose how they consider diversity when nominating director candidates.

Shareholders are also making the push. According to Institutional Shareholder Services Inc., the number of shareholder proposals at public companies related to board diversity tripled in 2013.

And this effort is global. Some countries, such as Norway, have even implemented mandatory gender quotas on public company boards.

The vast majority of Idaho’s corporations are private rather than public, which begs the question of whether board diversity matters in Idaho. But most of the rationales for board diversity in public corporations also apply in private ones.

First, a dominant rationale for board diversity is that a more heterogeneous group will be more innovative, because it will consider a variety of perspectives. Interestingly, this rationale is even stronger for private companies than for public ones, because directors of private companies are more heavily involved in advising management about business decisions than directors of public companies.

Second, a diverse board will better perform its monitoring function, because it will be less likely to merely rubber-stamp management’s decisions. For most private companies, this argument is less compelling than for public companies, because private boards play less of a watchdog role than public boards do. In private companies, shareholders are often managers, or at least employees, themselves, so they rely less on the board’s monitoring function than public shareholders.

A third rationale is increased responsiveness to customers, who are themselves diverse. This rationale applies equally to private and public companies, especially as private companies increasingly engage in international trade. Indeed, according to the Idaho Commerce Division of International Business, more than 88 percent of Idaho’s exporters are small businesses.

A fourth argument is improved recruitment and retention of diverse employees, because a diverse board signals that a company does not have a “glass ceiling” and enables the company to be responsive to the needs of a diverse workforce. This rationale applies equally to private companies. According to the U.S. Bureau of Labor Statistics, Idaho’s 2012 civilian labor force was 44 percent female and 13 percent Hispanic or Latino.

A final argument is that, in light of the increasing attention being paid to this issue, a diverse board signals that a company is forward-looking and progressive. Especially as Idaho’s private companies seek to compete nationally and internationally, it certainly could not hurt to send this signal.

In fact, some of Idaho’s largest private companies are already doing just that. For example, the J.R. Simplot Co., which ranked first on the Idaho Statesman’s 2013 list of “Idaho’s Top Private Companies,” has a 20 percent female board of directors.

It makes good business sense for Idaho’s private corporations to reap the benefits of a diverse board of directors.

wgcouture@uidaho.edu

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