Good corporate governance is about many things — boards that act independently, robust shareholder rights, accurate accounting, reasonable and fair executive compensation, and so on. No single parameter defines good governance. It takes a village.
But with board independence in the spotlight recently, it’s easy to overlook another aspect of good board health that’s just as important to performance: diversity. While not all studies on board diversity reach the same conclusion, many agree that putting women on boards can be a good thing for shareholders. In particular, many studies agree that a critical mass of women on boards — variously defined, but often somewhere around three women or 30% of the board — is positively correlated with performance measures like return on equity, Tobin’s Q, lower cost of debt, or quality of earnings. Pension giant CalPERS noted in a 2009 report that “companies with more diverse boards…have higher performance on key financial metrics, such as return on equity, return on sales, and return on invested capital.”
Urban Outfitters’ recent move to nominate a woman to serve on its board ought to serve as a case in point. As company that markets fashion apparel, accessories, and home goods (at its namesake stores as well via its other brands, like Anthropologie and Free People), it seems reasonable to think that the perspectives of women could be useful to its board. Many shareholders agree. A 2011 shareholder proposal requesting simply a report on board diversity won 22% shareholder support, and a 2012 shareholder proposal requesting that the company commit to a policy of seeking women and minority candidates for every director search won 38% of the shareholder vote. A vote in favor of nearly 40% is considered a strong signal that an issue proposed for consideration should get serious attention, and action, from directors.
But this is where it gets complicated. In fact, neither proposal was adopted by the company, despite the strong showing of shareholder support. Urban Outfitters’ management has also recommended that shareholders vote against a shareholder resolution requesting that the company make racial and gender diversity part of every director search, just as it did in 2012. And the woman being added to the company’s board? In addition to being a senior manager at the company, she’s the CEO’s spouse.
It may be that she is quite capable of acting independently from company management, not to mention the CEO. But, in general, we as shareholders expect that company insiders and relatives are less likely to act independently, and decades’ of research confirms that the greater the role of families and insiders, the smaller the chances of true independence.
It’s not the first time that Urban Outfitters has nominated an insider to the board, either. As a whole Urban Outfitters’ board skirts the edges of listing and regulatory requirements for independence; two of the seven directors are identified as affiliates of the company and two, if the entire slate is elected, are insiders. One of the “affiliated” directors is the brother-in-law of the co-president of one of the company’s brands, and another is a partner in a law firm that got nearly $2 million in business from the company in its most recently completed fiscal year.
The value of board diversity ought to be in the fact that diverse perspectives increase a board’s independence and objectivity. Women, who have long been excluded from boards, can bring fresh perspectives to the boardroom. But the chances that those fresh perspectives will come from a company insider and family member of the current management are not especially high. Of the 13 companies Urban Outfitters lists as peers in its 2013 proxy statement (in order to benchmark executive compensation), all but three have more than one woman director. The median number of women on the boards of Urban Outfitters’ self-selected peer group? Three. One wonders if Urban Outfitters would have so readily kiboshed the proposed diversity initiatives if that decision had itself been put before a more diverse group.
Good governance in many ways is straightforward. Managing the corporation and overseeing the management are two fundamentally different roles. There are reams of examples of how bad things can get when those roles are blurred. Robert Monks and Nell Minow, in their classic book Corporate Governance, give vignettes from the governance of Enron, Tyco, Countrywide, Chesapeake Energy, Lehman Brothers and others that serve as ample warning on the dangers of having boards too cozy with management to question things that later cost billions of dollars and robbed thousands of Americans of their pension assets, jobs, and nest eggs.
It is past time for all companies to get serious about board diversity, and to do so in ways that comport with other parameters of good governance. Diversity is a source of independence, and independence is what makes boards valuable.
