The History of 'The Old Boys Club'
All-Male All-White Board
The Old Boys Club
Does diversity in the members of a board of directors really provide a significant performance benefit to the company and society as a whole? A study produced in 2003 by Korn Ferry International demonstrated exactly why boards had attained a reputation for being ‘old boys clubs’ and how much the demographic of the members of board of directors has shifted in the last 40 years. This study was based on Fortune 1000 companies and exhibited that in 1972 only 9% of boards consisted of a member of an ethnical minority while 11% had one member that was female.
This is an issue that needed to be addressed if not for the good of the company than for the good of society as a whole. The aforementioned data from 1972 has been eradicated in the 40 years since the findings. A report published in 2012 shows that of the current Fortune 1000 companies circa 87% have at least one female on the board of directors. This has been due to an intensifying increase in the focus on corporate governance and corporate social responsibility (CSR).
The increase in women and ethnic minorities on boards in recent years is more than companies just offering the position as a token in order to shed a better light on the company. Figures released in 2014 showed that of the Fortune 500 companies 24 of them were run by female CEOs. Furthermore in 2016 there were five black CEOs of Fortune 500 companies and just one of these, Ursula Burns, was both female and black. The fact that only five of the Fortune 500 companies are run by a black CEO is made significant as in the history of Fortune 500 there have only been 15 black CEOs. This increasing power given to not only women but also minorities should have an effect on the future of corporate life. Although in recent years there has been a shift in the right direction in terms of board diversity this paper argues that the changes to society in recent years ought to deem equal participation on boards a societal priority.
The need for Gender Inequality change
The History of Old, White, Privileged Men on Boards
There are a number of factors that contributed to the domination of old, white, privileged men (“OWM”) on boards in the 20th century. The factors that the author identifies in this paper are the educational levels of white males in comparison to those of white females, and each ethnic minority gender. Similarly, the overall view held by society in general towards women and ethnic minorities (“EM”) will be examined.
It has long been accepted that the higher one’s educational background is, in general, the more susceptible they will be to gaining promotion within a company or entering at a higher level than that of their lesser academically qualified peers.
The earliest known date for an EM to graduate with a bachelor’s degree from a US college is 1823. The man’s name was Alexander Twilight and he graduated from Middlebury College. It wasn’t for another 17 years that the first female obtained the same standard of degree in the US when Catherine Brewer was awarded the first degree in a class of 11 women. The UK did not automatically follow the societal advancement of the US in admitting women into third level education. It wasn’t until 1880 that the UK awarded their first bachelor’s degree to a female from the University of London.
Notwithstanding the fact that women and EM have been earning degrees for over 160 years data as recent as the mid-1970s demonstrates that college participants were, in a strong majority, white. A report published in the US by the National Centre for Education Statistics (hereafter “NCES”) states that in the academic year beginning 1976 of the people earning a bachelor’s degree 89% were white. The significance of this is that the OWM being referred to in this paper are of a generation where only 11% of highly educated people are from an ethnic minority background. This may have implications as to why there is reluctance from these OWM to give up their seats on boards to facilitate a group that they may perceive as less intelligent. As the years progressed changes in the ethnic background of people obtaining degrees occurred. The NCES reported that in 2012 EM accounted for 31.2% of all people obtaining a bachelor’s degree while the number of white people obtaining degrees had almost doubled, they accounted for just 68.8%. The shift in the demography of people being awarded bachelor’s degrees is a positive one but it there is still a need to strive for parity.
However, the same could not be said with respect to white women. The same report showed that in 1976 women accounted for 45% of all white people obtaining a bachelor’s degree. This leads to the point that if it was not educational standards that were preventing women from sitting on boards in the 1970s what was preventing them? A question that will be addressed in the next section. Furthermore to these figures, in 1990 women surpassed men in terms of people being awarded bachelor’s degrees with a majority of 56%. This is a majority that has continued to gradually increase in recent times. The same statistic for 2012 states that women account for 57%.
Earlier in this paper we mentioned that of the five black CEOs of Fortune 500 companies only one, Ursula Burns, was both a woman and black. This statistic is stifling if it is taken in conjunction with the statistics regarding blacks being award bachelor degrees. As far back as the mid-1970s black women have been the majority of blacks obtaining degrees. In 2012 black women accounted for 66% of all black people being awarded degrees. Furthermore, black women were also dominating the awarding of master’s degrees within their ethnic background with 70% of all master’s degrees earned by a black person in 2012 being award to a female. Considering these statistics it is incomprehensible why black women only account for 20% of black CEOs of Fortune 500 companies and 0.2% of all CEOs at the same companies.
There has always been a significant role played by society regarding the rights given to, and prejudice towards, both EM and women. It could be argued that these prejudices have deterred the aforementioned groups from dominating the boards of publicly traded companies. However, these views are not the only influence that has affected the membership of EM and women on boards of publicly traded companies. There may be other factors at play such as the recruitment processes that have been instilled since the foundation of some of these companies which in turn may lead to nepotism and the lack legislation, particularly in the US, regarding maximum tenures or mandatory retirement ages for members of boards.
Society Prejudice: Women
A combination of the aforementioned information clearly exhibits the extent to which there is a ‘glass ceiling’ within the American corporate system in terms of women progressing. An attributing factor to this is how society is set up to reward the hardest working and most dedicated to their career. In this regard the biggest obstacle facing women is pregnancy. In the US over 4 of every 5 women become mothers. The effects that pregnancy has on the career progression of a woman can be dramatic. It may result in extended periods of leave, a reduction in the hours worked, and subsequently, a reduction in the earnings per hour of mothers.
The effects of this have been studied in recent years. This study displays that parenthood has an effect on mother’s wages; decreasing them on average by 5%. There are also major discrepancies in the amount of leave taken by mothers and fathers. It is estimated, from a sample of parents, that the average mother takes 342 days of leave while fathers take just 23. It has been argued that these two factors have a correlation that is a result of the human capital theory.
“Human capital theory predicts that experience and seniority have positive returns because they involve on-the-job training that makes workers more productive.”
The distinguishing fact regarding the effect of the above theory is that in the US and the UK there are laws in place that state women must take a certain amount of leave after the birth of a child. This is how society prejudices against women and punishes their career progression for having children while men have the same benefit of the child with, in general, an increase in wages and little or no negative effect on their career.
Society Prejudice: Ethnic Minorities
“Five score years ago, a great American, in whose symbolic shadow we stand today, signed the Emancipation Proclamation…One hundred years later, the life of the Negro is still sadly crippled by the manacles of segregation and the chains of discrimination. One hundred years later, the Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity.”
These were the words delivered by Martin Luther King during his famous ‘I have a dream’ speech in 1963. The words spoken reflect the feelings of everyday ethnic minorities in the US during this time period. They were viewed; by enlarge, as second class citizens to the white majority in the US.
This made it very difficult for EM to progress through companies and indeed sit on boards as they were viewed as not worthy so they would often be capped as positions below directors. The same could not be said for their white colleagues. It was not until the following year, 1964, that the first black man was appointed as a director of one of the US’ largest companies. This man was a Cornell educated lawyer by the name of Samuel Pierce. Even in today’s society EM account for only 15% of the top 200 S&P 500 directors.
It could be debated that a maximum tenure requirement for members of boards would lead to an increase in diversity within boards. Currently in the US there is no legislation or corporate governance code regarding this issue. As a result of this the power to alter company by-laws regarding maximum director age are at the discretion of the board themselves. This has led to an increase in the ‘mandatory’ retirement age for directors within the S&P 500.
A report compiled by Spencer Stuart shows that of the 73% of S&P 500 companies that have mandatory retirement ages, 34% have this age set at 75 or older. The same study in 2005 showed that this figure stood at just 8%. This clearly exhibits that directors are using their power in order to prolong the long of their tenure. This statistic can be combined with the average age of directors of these companies to see exactly why there has been such a sharp rise in the mandatory age in such a relatively small time period. In 2005 the percentage of all S&P 500 board with an average age of 64 or older was 18%. However, this figure for 2015 has risen by 21% to 39%. The people with the power to alter these by-laws are exercising this power. This has resulted in over one-fifth of all S&P 500 companies having a member of the board in place for a period of over 11 years.
It has been argued that the impact of this may lead to an increase in undue deference in terms of people entering positions of senior management. There is also the observation that some of the elder directors may have “fossilised positions that are no longer relevant in the changing economic and business environment”.
The above observations allow one to conclude that while white women has surpassed white men in educational attainments they have not been able to break the glass ceiling on an equitable comparability due to a number of factors but most predominately the fact that they become mothers. This is a trend that needs to be acted on by legislatures and companies alike.
There are signs that EM are on course to equal the representation between them and whites in terms of educational attainment. This is a trend that is being spearheaded by EM females as noted above. Perhaps a policy endorsing affirmative action for EM males is needed in order to increase participation rates. However, the level of educational attainment is not being equally represented with respect to the percentage of Fortune 500 companies appointing EM and female directors.
This is attributed to by a number of factors such as the societal prejudice that exists in the US towards EM and females in the workplace. There is also an impact due to the lack of recommendations or legislation governing director tenure as noted above.
© 2018 John Wolfgang