Laws Requiring Board Diversity Are Becoming More Common. Here’s What to Know.
Skip to content
Organizations Policy Jun 1, 2021

Laws Requiring Board Diversity Are Becoming More Common. Here’s What to Know.

“Companies want to be ahead of the curve on this.”

Corporate directors with certain backgrounds and experiences exert greater influence over a company's strategic direction.

Lisa Röper

Based on insights from

Mark McCareins

Companies have long been talking about how their boards need to be more diverse. But now the legal landscape is changing, with some states mandating that companies do more than talk.

Add Insight
to your inbox.

In Illinois, for instance, boards of publicly owned companies are required to disclose female and minority board membership, as well as how they identify and appoint those members. California has gone even further, mandating that boards have at least one woman, as well as a certain number of directors from underrepresented racial, ethnic, or LGBT communities. Other states, including Washington, Colorado, and Pennsylvania, have also passed legislation to encourage diverse boards, and more are considering this step.

All of this means that, in addition to being an ethical and reputational imperative, boosting board diversity is quickly becoming a legal one as well. So what should companies keep in mind?

“Because there’s such a patchwork of inconsistent state statutes—and because many of these statutes are looking at different kinds of diversity—it’s very hard, from a compliance standpoint, to figure out a one-size-fits-all answer,” says Mark McCareins, codirector of Kellogg’s JDMBA program and a clinical professor of business law.

That said, there are certain things that companies should understand about this quickly evolving legal landscape.

At Least for Now, the Real Pressure Is Coming from Investors

Not all of these new legal requirements come with teeth. While some of the new state regulations include fines for companies that fail to comply, others are merely advisory.

“Some of the new statutes say, ‘we want to know what you’re doing in this area, but we haven’t decided yet what we’re going to do if you don’t report or you report and the numbers aren’t to our liking,’” McCareins says.

There are also some inherent limits to just how strong their enforcement can be. For example, a company in one state can reincorporate in another if it feels overly burdened by the board regulations.

That’s why, at least for now, the larger incentive is reputational.

“The biggest hammer in all this is probably from a perception in the equity markets that you are not a company that plays by the rules,” McCareins says.

Investors are making their will known in other ways, too. Last year, the NASDAQ submitted a proposal to the SEC that called for instituting diversity requirements. And institutional investors such as BlackRock, Vanguard, and StateStreet are pushing firms to ensure greater diversity on their boards.

“If I’m a public corporation, whether or not I’m currently under state or federal regulation, I’m probably going to be as concerned about what my investor base—and specifically my institutional investors—are thinking about this issue,” says McCareins.

“Regulators and investors are going to start taking baby steps in the hopes of getting companies’ attention—and in the hopes that they end up doing the right thing.”

— Mark McCareins

As with other ESG issues such as climate change, McCareins predicts that scrutiny over board diversity from a range of stakeholders will only increase over time.

“Companies want to be ahead of the curve on this and other issues,” he says. “These statutes have brought it into the corporate mindset that there really hasn’t been sufficient progress to diversify corporate governance. So regulators and investors are going to start taking baby steps in the hopes of getting companies’ attention—and in the hopes that they end up doing the right thing.”

Consider Your Bylaws

All of this means that as companies anticipate new mandates, they must also consider whether their own bylaws could stand in their way.

“Let’s say our company has bylaws where a five-member board all have eight-year terms,” McCareins says. “They have just been appointed in the last year. The company would love to be more diverse, but now we’re stuck with this board for the next seven under our bylaws.”

This can put companies in a legal bind. A company that slow-rolls its compliance efforts may face legal action from shareholders. But if the company takes actions to comply with new state laws and runs afoul its own bylaws in the process, that may create other legal problems.

“You could see shareholder derivative suits against boards for not fulfilling their fiduciary duties,” McCareins says.

Ultimately the power to change the board’s bylaws resides in the hands of shareholders. After all, while boards typically make recommendations to reconfigure their own makeup, they cannot do so unilaterally.

“Let’s say shareholders vote and say, ‘no, we don’t want to change the bylaws,’” McCareins says. “That’s where the rubber hits the road and state regulatory policy runs head-on into the shareholders who own the company.”

McCareins recommends that the board’s governance committee start by gaining a comprehensive understanding of the applicable state DEI statutes.

“Where a change is—or will be—mandated, the governance committee then needs to formulate proposals to reflect these changes in board composition,” he says. “If the governance committee feels ill-equipped to evaluate DEI principles, an outside consultant in such matters can be brought in to assist.”

Embrace the Opportunity

There is plenty of good advice out there on how to find and retain diverse board members—and set them up for success. (For instance, see here and here.

McCareins advises companies to embrace the process—not just as a risk mitigation strategy, but as an opportunity for continued growth.

He recommends codifying the nomination criteria and diversity metrics that would comply with necessary requirements and would fit the company’s goals. In addition to boosting gender or racial diversity, this may also be an opportunity to diversify in terms of professional backgrounds or skills. Or perhaps it is an opportunity to recruit directors who can better represent the voices and experiences of diverse clients, customers, and other stakeholders.

“Every company is different and every company culture is different,” McCareins says. “It is up to the nominating committee to spend time early in the process to identify the metrics which make sense and are attainable for their business.”

Featured Faculty

Clinical Professor of Business Law; Co-Director, JDMBA Program

About the Writer

Fred Schmalz is the business and art editor of Kellogg Insight.

Most Popular This Week
  1. How Much Do Boycotts Affect a Company’s Bottom Line?
    There’s often an opposing camp pushing for a “buycott” to support the company. New research shows which group has more sway.
    grocery store aisle where two groups of people protest. One group is boycotting, while the other is buycotting
  2. 5 Takeaways on the State of ESG Investing
    ESG investing is hot. But what does it actually deliver for society and for shareholders?
    watering can pouring over windmills
  3. Could Bringing Your "Whole Self" to Work Curb Unethical Behavior?
    Organizations would be wise to help employees avoid compartmentalizing their personal and professional identities.
    A star employee brings her whole self to work.
  4. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  5. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  6. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  7. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  8. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  11. 3 Tips for Reinventing Your Career After a Layoff
    It’s crucial to reassess what you want to be doing instead of jumping at the first opportunity.
    woman standing confidently
  12. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  13. Podcast: Does Your Life Reflect What You Value?
    On this episode of The Insightful Leader, a former CEO explains how to organize your life around what really matters—instead of trying to do it all.
  14. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  15. In a World of Widespread Video Sharing, What’s Real and What’s Not?
    A discussion with a video-authentication expert on what it takes to unearth “deepfakes.”
    A detective pulls back his computer screen to reveal code behind the video image.
  16. College Campuses Are Becoming More Diverse. But How Much Do Students from Different Backgrounds Actually Interact?
    Increasing diversity has been a key goal, “but far less attention is paid to what happens after we get people in the door.”
    College quad with students walking away from the center
More in Organizations