Corporate Board Changes: Working With New Regulations that Require Greater Diversity

In 2018, California created new regulations that require greater diversity on corporate boards. Other states may follow suit soon, assuming legal challenges can be overcome. How can advisors use these changes to increase collaboration and client contact? The key may be how boards may become more focused on company culture.
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As to the law in California, the over 700 publicly traded companies have until 2021 to implement the law or face fines up to $300,000. The law mandates female directors on publicly traded company boards in an effort to advance gender diversity. Importantly, the law applies outside of California.  Specifically, it applies to all companies with headquarters in California, even if they are incorporated in other states (like Delaware or New York). The impact on the performance of the company of a more diverse board is minimal at best, business professors note, but the impact on other elements of the company may not be known. Other business impacts could include greater say in selecting a chief executive or other c-suite level strategy drivers.  The relationship goes both ways and CEOs and boards choose each other and encourage rises in impact levels (e.g.,a c-level executive may rise to a CEO based on board choice and CEOs may nominate individuals for board election).
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California’s law follows France, Iceland, Norway, Germany and Spain that have requirements for gender diversity on corporate boards. Pennsylvania has also passed resolutions to encourage more publicly held companies headquartered there to increase gender diversity on their boards. Resolutions, however, are not law and have no teeth to enforce them.
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The California law has its basis in a genuine lack of diversity on corporate boards. According to some studies, women hold less than 20% of the board positions at the largest 3,000 publicly traded companies.  Yet, singling out one group and demanding their inclusion may be considered a preference, and as such the California law may be unconstitutional on equal protection grounds (a constitutional dispute).
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Whatever happens with the law, the focus on corporate board composition can be a great opportunity for advisors to increase collaboration with the board on employee retirement plans.  Directors today may be more engaged than before and have a broader viewpoint than a decade ago. That kind of engagement may help change the culture on a board.
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As boards shift into being risk management minded and advance planning focused, advisors can use this shift in focus to increase their communication with the board. As the culture of the board changes, it may also follow that the board focuses on the culture of the company. That new focus or change in focus could be an opportunity to increase the board’s involvement retirement planning.
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As boards become more forward thinking, advisors can position themselves to create more responsive or flexible options for employees in terms of retirement. And, as retirement options become an attractive part of recruiting and employee retention, boards may be interested in how to plan for future changes in retirement options. Advisors can create open communication and encourage ideas, while finding opportunities to increase education to the board on fiduciary responsibilities and plan changes.
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Additionally, as boards become more responsive to risk and crisis, advisors efforts to be more collaborative and to increase communication with board members may be met more favorably than in the past. Boards may also lean more on advisors as they become more diverse and more flexible. As the corporate board culture changes, reliance on advisors could also increase.  Corporate boards may also shift to focusing on how business strategy is aligned with the business’s culture. Employee retirement options and the company’s efforts to increase retirement readiness among its employees can be an important part of culture.