Board Diversity Increases Slowly

This article, the second in a two-part series looking at diversity in the boardroom, is drawn from ISS’ 2006 Board Practices/Board Pay study.

Minority representation on boards appears to have remained essentially stable over the past year, but there has been a gradual, though slow, trend over recent years to diversify boards in terms of ethnicity, according to a recent ISS study.

Among the 6,979 directorships in the 2005 director group for which definitive information on racial or ethnic status is available, 706 are members of minority groups--representing a little over 10 percent of the total, about the same as in 2004. This percentage is up from 7 percent in 1999. The current group of minority directors includes:

• 452 African-Americans (6.4 percent);
• 146 Hispanics (2.1 percent); and
• 107 Asian or Pacific Islanders (1.5 percent).

Larger companies are more likely to have minority directors on their boards than smaller firms. The correlation between company size and the likelihood that the board will have some minority representation is even more pronounced than with respect to female representation. (For more details on female board members, see the June 30, 2006, issue of Governance Weekly.)

The likelihood of a board including a minority director significantly increases at companies with revenue over $3 billion, where over half of the companies tend to have a minority director (rising to 83 percent at companies with more than $10 billion in revenue). Companies with less than $500 million revenue have a minority director only about 12 percent of the time, rising to 22 percent for companies in the $1 billion to $3-billion range. Companies in the lowest band (less than $500 million), however, have made the biggest gains since 1999, when only about 2 percent of that group identified a minority director.

Racial and ethnic diversity on boards varies by economic sector, but there has been some small change over the last year. The energy industry remains the sector least likely to include minority directors on the board, but industrials increased representation in 2005. Telecommunication services companies have the highest proportion of minority directors, followed by utilities and consumer staples.

Thanks to steadily increasing minority recruitment at smaller corporations that peaked in 2003, the proportion of minority directors has grown over the past six years. As with the proportion of women directors, though, this growth stagnated over the past year despite board overhauls brought on by new regulations. Twelve companies (five fewer than in 2004) reported that they had at least four minority directors on their boards as of 2005. Citigroup and FirstBanCorp Puerto Rico each reported five minority directors.

Minority directors are far more likely to be independent from the company where they sit on the board: 86 percent of the directorships held by minority directors are classified as independent (up from 84 percent in 2003), compared with only 71 percent for Caucasian directors. Similarly, only 8 percent of minority directorships were considered affiliated, while 12 percent of Caucasian directorships were classified as affiliated. As noted earlier, these dramatic differences between the general independence levels of minority and Caucasian directors make it somewhat surprising that mandates for higher independence levels on the board did not lead to recruitment of significantly more minority directors by S&P 1,500 companies over the past two years. Only 7 percent of directors new to boards in the past two years are minorities.

Few minority directors are employed by firms where they sit on boards, perhaps reflecting the continued small number of minority employees in top executive positions. Only 0.3 percent of all directorships are held by minorities who are employees, and 74 percent of those directors are CEOs of their firms. In 2005, 25 companies (one fewer than in 2004) that had a minority-identified CEO.
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