Quotas prove irrelevant as companies diversify boards on their own terms

It’s too bad that "quota" isn’t a four-letter word.

It ought to be, given how much reflexive ire it incites among those who insist that directors must be invited to corporate boards on the basis of qualifications without regard to identity.

In the past few weeks, quota critics have enjoyed two moments of victory. In April and then in May, California's board quotas were struck down by superior courts on the grounds that they were unconstitutional. A 2018 law had required that publicly held companies headquartered in California must have a minimum of women and racial minorities or LGBTQ persons on their boards by this year. (The law applied to boards of five or more people.)

I’ll pause for a moment for their champagne to go flat, because their moment of vindication fizzed out before it even happened.

The truth is, the quota argument was California posturing in its self-appointed role as the national change agent for what its lawmakers believed to be recalcitrant corporate holdouts.

Incredibly, one argument that the state used in its defense was that it actually wasn’t enforcing the law, as noted by the conservative Standing for Freedom Center.

The business case for diverse boards continues to accumulate. The better the brains, the better the outcomes, no matter how those brains are packaged. What they miss is that identity is integral to being qualified because every board must represent a variety of views, experience and technical expertise. Otherwise, how will boards populate their committees, which require specific expertise?

California’s attempt at quotas served its purpose. It forced holdouts to wrestle with their reluctance to admit that qualifications include gender, racial and identity experience, along with technical and business prowess. But while the quotas were being challenged, the rest of the world moved on. As of last year, every company in the S&P 500 included at least one woman on its board, as cited by Catalyst, the women’s corporate advocacy nonprofit.

“More companies and investors — aware of the myriad research from McKinsey and others that demonstrates board diversity benefits the bottom line — have been calling for increased transparency and action, especially in recent years. This includes companies and organizations like BlackRock, Goldman Sachs, Vanguard and Nasdaq to name a few,” said Elissa Sangster, CEO of the Forte Foundation, which advocates for women in MBA programs, and a former member of the women’s initiative of the CFP Board.

While board diversity is important, cultivating a diverse pipeline of talent is even more important, Sangster added. After all, where do tomorrow’s diverse board members come from, if not from today’s middle managers who are pulled into stretch assignments that equip them with precisely the kind of experience that eventually qualifies them for boards? The functional value of a diverse board is self-apparent to many companies and investors.

“I don’t believe that the striking down of these two statutes will have a negative impact on the momentum for diversity. I don’t think that companies will stop focusing on this,” said Ryan Wilkins, chair of the corporate and securities practice at California business law firm Stradling. The Nasdaq approach (approved by the SEC last year) is a well-aimed chop, in his opinion, because “it’s a rule, not a quota, that results in disclosure. It encourages diversity but if you don’t appoint people from different backgrounds, you have to explain why.”

Like Sangster, Wilkins emphasizes that expectations for board diversity are rising among pension funds, proxy advisory firms, institutional investors, and others. “I believe that there have been many people added to boards, to meet diversity or gender expectations, in contemplation” of widespread accountability, he said.

In other words, California’s attempt at quotas is being overtaken by a rising tide of peer pressure. Looks like lasting change will be catalyzed by a four-letter word after all.