As of 2022, men still constitute the vast majority of board members and CEOs. Corporate leadership is still an 鈥淥ld Boys鈥� Club鈥�. However, corporate boardrooms have finally begun to change toward greater inclusion. Over the past twenty years, most of the world鈥檚 top ten economies have embraced regulation to advance boardroom gender equality. In California, for example, a board diversity statute, SB 826 requires corporations to have a minimum number of women sitting on their boards. More recently, California鈥檚 Assembly Bill 979 mandated inclusion for underrepresented groups. Similar initiatives also seek to include members of racialized communities and other underrepresented groups on corporate boards. While this legislation has been challenged in the courts, such legislation encourages us to take more seriously the importance of diversity.
As battles over diversity intensify, activist shareholders are playing an increasingly important role. Shareholder derivative lawsuits have begun to challenge boards that have shown inaction in improving diversity. These lawsuits often claim that the directors have breached their fiduciary duties by creating an environment that is unwelcoming to diverse directors. In a recent case, Natalie Ocegueda v. Zuckerberg, the complainant challenged Facebook's alleged lack of diversity as a violation of the directors鈥� fiduciary duty to the corporation and its shareholders, and as false and misleading statements because it contradicts Facebook's public proxy statements about its commitment to diversity. While the court ultimately dismissed the lawsuit, this case demonstrates that shareholders are beginning to leverage the judicial system to improve board diversity.
Another trend has seen institutional investors making bold public statements about commitments to pressure companies to increase board diversity and to be more transparent about current diversity practices. These statements may reflect a growing worry by institutional investors that they will be the next group to fall under the public spotlight. Nevertheless, stakeholders and stockholders will evaluate investors based on their claims in these areas and will surely keep a sharp eye on their actions. They may begin to raise questions if homogeneity continues to dominate leadership of the boards of institutional investors, and the boards of the firms in which they invest.
These trends raise important questions about the duty to diversify in corporate law. Is this duty located within the firm and its ownership structure? If so, do institutional investors have a duty to focus on corporate culture and push for gender equality and diversity in the boardroom? These are the questions that guide my recent paper, co-authored with Professor Anat Alon-Beck and Judge Michal Agmon-Gonnen,
In this paper, we argue that because institutional investors play a dominant role, perhaps they should have a duty to oversee gender equality. Institutional investors seek to ensure the long-term value of their investments, which leads them to emphasize sound corporate governance. If diversity and gender equality are essential to good governance, these investors should be reassured by diversity and gender parity in and the .
Locating equality requirements in the corporate law of fiduciary duties makes sense when we pay close attention to the unique role that institutional investors play in monitoring corporate governance issues. Institutional investors have influence over the composition of the investee company鈥檚 board. They must select the 鈥渂est鈥� board members to serve the corporation for its own benefit and the benefit of its shareholders. As we argue in our paper, a new fiduciary duty to focus on corporate culture, diversity and equality could bolster governance for several reasons.
First, and most importantly, creating a fiduciary duty for diversity and gender equality would establish a normative goal, reflecting the public value that equality already holds. Second, social science literature already demonstrates that diversity enhances effective decision-making, risk oversight and innovation by thwarting 鈥済roup-think鈥�. Third, research also demonstrates that companies lacking diversity underperform in Not only are they more prone to excessive risk, but they may also face reputational harm. Fourth, since institutional investors seek long-term returns, they must invest in public companies with strong, independent boards that exercise high-quality oversight. Diversity reinforces this. Finally, institutional investors are particularly well-positioned to uncover how firms should diversify and strive for equality.
Creating a fiduciary duty to change the old boys鈥� club culture of corporate boards and C-suites offers a practical way to advance inclusion in corporate governance. This duty would cross both the duty of care and the duty of loyalty by requiring leaders to make informed and prudent decisions and creating an obligation to promote diversity equality and inclusion. Creating a fiduciary duty to promote inclusion would provide an accountability mechanism to ensure that directors act on this imperative.
Our arguments about locating equality requirements in the law of fiduciary duties are bolstered by the observation that several institutional investors may already be acting as if such a duty exists. In the wake of the Black Lives Matter movement in 2020, many institutional investors began to respond to an important cultural shift. The increase in the number of Chief Diversity Officer (CDO) positions speaks to this change. So do the actions of some CEOs, such as David Solomon at Goldman Sachs, who, in an interview with CNBC, insisted that .
These initiatives may be part of a larger 鈥減aradigm shift鈥� in corporate governance, which recognizes the benefits of gender diversity in management. But several barriers remain, notably in current selection processes, investment analysis and due diligence. Our paper proposes some solutions. First, we advocate for a duty to disclose, in proxy statements, all data relating to diversity for all public companies. Second, we call on companies to take proactive measures internally to adopt specific policies that will promote diversity through hiring, with particular attention to search committees and selection processes.
This paper, and indeed much of my work, rests on the premise that equality and diversity are normative imperatives that are not only necessary, but also create value for investors, businesses, and society. Corporations today must be particularly responsive to the challenges and complexities of our changing societies. To grow and compete, they must count on talented and diverse teams who will adapt to dynamic market conditions and create value for shareholders and society.
For the full paper on which this post is based, click .