Gender Diversity on Boards: Reaching Gender Parity

December 1, 2017

If you’ve been following Farient’s series of Briefs regarding gender diversity on boards, we think you will agree we have highlighted some interesting facts. First, the representation of women board members varies significantly among industries. Second, although the percentage of women directors on public company boards is increasing, our most recent Brief shows that this has been accomplished primarily through newly added board seats versus replacing men who hold current seats. The question is why are companies adding board seats rather using vacated seats to increase board diversity? This Brief focuses on some of the reasons companies are using this approach to gender diversity on boards rather than replacing existing board members.

“In lieu of filling existing vacant board seats with qualified women, many companies are adding board seats to increase the number of women on their boards. Since gender diversity on boards is important to stakeholders, many companies are finally taking the diversity mandate seriously. With board attrition across the S&P 500 at just over 7 percent, we expect the addition of open board seats to accelerate the achievement of diversity goals.” – Randi Caplan, Vice President, Farient Advisors

Shareholders and stakeholders, in general, are pressuring companies to diversify their boards. Several groups promoting gender diversity on boards have set specific diversity goals for public companies. For example, 2020 Women on Boards has set a goal of 20 percent women directors on all U.S. boards, while the 30% Club, started in the UK, is pushing for 30 percent women directors on FTSE 100 boards. Given current board attrition rates, Farient wanted to determine how long it would take to meet these goals.  We thought a model may explain why companies have been adding director seats, and also allow us to create diversity projections for the S&P 500 and the Russell 3000.

In the U.S., the 2016 S&P 500 attrition rate for directors was approximately 7.5 percent. This represents 373 directors leaving their respective boards of the nearly 4,900 directors in the index. If women take 50 percent of these newly opened seats, we will achieve 30 percent women directors sometime in 2020.  On the other hand, if women are selected to fill only 35 percent of these vacated seats, it will take nearly 10 years to reach the 30 percent target.

The good news is that these interim goals are achievable in the relatively short term. However, the question remains, how long will it take to reach gender parity in the boardroom? According to our model, it will take until 2068 for the S&P 500 to reach gender parity when starting with our board attrition rate of 7.5 percent, and assuming that 50 percent of the open seats will be filled by women. For the Russell 3000, which is starting with a lower percentage of gender diversity on boards, the year is 2071 to reach parity.

Today, board attrition rates are in the single digits and pressure is mounting to address gender diversity on boards quickly. Given these models, it’s clear why boards are expanding in size to ensure they are on the path to meeting diversity demands. Short of forced attrition and/or diversity mandates, expanding the board is the most efficient way to accelerate greater gender diversity on boards.

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