Grant Bremer of Equilar recently published an article on the Harvard Law School Forum on Corporate Governance and Financial Regulation that notes that declassified boards—where each director is elected annually—are more gender diverse than classified boards. He also notes that there has been “a strong migration away from classified boards to annually elected boards. Indeed, almost 90% of large-cap companies now have declassified boards, up from almost two-thirds in 2011.” And it is among large-cap companies that gender diversity has progressed fastest. The boards of the largest companies in the Russell 3000 Index—those classified as mega-cap—are on average nearly 28% women, which is roughly double the U.S. average. And none of those companies have a classified board.
Much has been written about board classification, and not all of it is in agreement (surprise!). A classified board is one in which directors are grouped into classes and only one class is open to election each year. Thus, on classified boards, directors serve multi-year terms. Some regard this as a way to preserve institutional memory and expertise, and it probably is. It also gives companies more power in the event of a hostile takeover bid. But it also decreases accountability, in that no matter how unhappy shareholders are with the directors elected to serve them, they cannot generally unseat a majority of directors in a single year.
The Council of Institutional Investors supports board declassification as one mechanism to help assure that directors are accountable to shareholders. Major proxy voting services evaluate classified boards as restricting shareholder rights, in the same light as anti-takeover provisions or poison pills, and may recommend votes against boards that amend charters or bylaws to classify their boards.
There has also been a lot written about board diversity. Bremer notes that the largest companies in the Russell 3000 Index, which have greater gender diversity than smaller companies, beat the index median performance by 7.5% (mega cap) and 4.7% (large cap). There is also a healthy collection of literature linking board and senior management diversity with financial outperformance.
It’s not a surprise to see two indicators of good governance linked together. But in the investment world, hunches are not very valuable without solid evidence to reinforce them. It’s good to have these numbers and another piece of the good governance puzzle fitted into place.