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Mar 01, 2019

Small-cap board diversity a decade behind S&P 500

New Morningstar research shows small-cap board diversity has just hit level S&P 500 reached 10 years ago

Gender diversity in small-cap boardrooms is a decade behind the S&P 500, according to new research from Morningstar ahead of International Women’s Day on March 8.

‘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,’ notes Morningstar in a statement announcing the report. Looking deeper into the numbers, however, it says the picture is not as encouraging as it might seem – particularly as you go down in market cap.

‘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 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. In fact, the financial services firm finds that nearly one quarter (24 percent) of women sit on more than one board in the US, compared with only 17.9 percent of men. As an example, it highlights five women who serve on five or more corporate boards: Ann Mather, Blythe McGarvie, Elisha Finney, Laura Brege and Pamela Patsley.

‘While small, the finding is significant and carries important implications,’ states Morningstar in the report. ‘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, overboarding is a red flag that many governance advocates raise with respect to directors who hold three or more board positions.’

And, as Sargis tells IR Magazine, ‘boards cannot become more gender-diverse unless the available talent pool does, too’ – and this is a key issue when it comes to board diversity. ‘When a search firm recruits for a new board position, it typically requires prior board experience or senior management experience,’ explains Sargis, which essentially turns out to be a ‘self-selecting process’. 

‘Female candidates meeting the traditional standards are a rare resource,’ she adds. ‘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’ uncovered in the research shows 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,’ says Sargis. ‘Companies must be actively supporting women throughout their careers, so they can advance into senior roles.’

Citing California’s 2018 rule change requiring public companies headquartered in California to have at least one woman on their board by 2019, Morningstar says that while ‘progress is slow, change can be swift’. 

By 2021, two women will be required if the board has five directors, and three if there are six or more directors. Citing findings from Board Governance Research, Morningstar says currently more than half (53 percent) of micro-caps in California have no female directors. So where will these women come from? 

‘While there will likely be an increase in first-time female directors,’ writes Morningstar, further overboarding could well be seen, and the report highlights that the trend for women to sit on multiple boards is nothing new: ‘In the past 15 years, the typical female director [was] on more boards than her male counterpart. The average female director is on boards at 1.3 companies, versus 1.2 for men.’ And the gap is actually increasing over time. 

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...