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S&P 500 corporate boards lack diversity, but these top companies are leading change — and the stock market rewards them

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Amid rising political heat over diversity in America, it’s good to zero in on racial and gender inclusion across the nation’s boardrooms. You’ll see both progress and challenges. One new discovery up front: the best shareholders in America appreciate board diversity. 

Few dispute female and minority underrepresentation on corporate boards compared to the population. Although Blacks comprise 13.4% of the U.S. population, close to 200 companies in the S&P 500
SPX,
+0.52%

have no Black director and only 8% of that cohort’s directors are Black, based on data collated by Institutional Shareholder Services. 

While every S&P 500 board has at least one female director today, women hold only 25% of the total seats. Among the broader Russell 3000, just 20% of seats are held by women, although  almost 200 of those companies have 20% or more female members, according to the advocacy group 2020 Women on Boards. 

All these percentages are up from a decade ago, and there is reasoned debate over the pace of change. But disagreement rages on the causes of underrepresentation. Among disputed causes: lack of prioritization by boards; gender and racial stereotypes or in-group bias, and underrepresentation of women or minorities in traditional pools or pipelines (which may, in turn, owe to stereotypes and biases). 

One reason the rate of progress is slower than some desire may be the mixed rationales for the quest. There are two broad potential rationales for board diversity: (1) the quantifiable economic interests of corporations and their shareholders, and/or (2) the qualitative social aspects of group decision-making and intuitions of fairness.  


Numerous studies find a positive association between gender diversity and economic performance.

Empirical research on whether diversity improves corporate economic performance is equivocal. Numerous studies find a positive association between gender diversity and economic performance, including those of Catalyst and J.P. Morgan Research. But almost none find any causation, according to a comprehensive survey by researchers at Stanford University. The data may reflect that high-performance leads to diversity, as much as that diversity leads to high performance.   

Testing the effects of board diversity on economic performance is complicated by the variety of relevant contexts to consider — such as board and company size, geography or industry— as well as the variety of board settings, such as addressing acquisitions, dividends, executive pay, financial reporting or corporate culture.

The social case is more compelling. First, the strongest general argument for board diversity is simple: the best group decisions result from a small number of people with a wide variety of backgrounds viewing an issue from many angles. It is also clear that boards should reflect a corporation’s various constituents, meaning diversity not only of race and gender but varying ethnic, cultural and other personal characteristics. 

Mere tokenism won’t suffice. Evidence suggests that only with a minimum representation of at least 20% do contributions of outsider groups cease being representative of that group but get judged on merit. That occurs more readily when members are selected voluntarily rather than by compulsion. That’s one reason why legal diversity quotas, such as California recently enacted for companies headquartered there, may miss their mark. But the Business Roundtable recently issued a sweeping commitment to inclusion, and the boardroom is a natural place for that elite group of CEOs to focus.  


America’s best shareholders and board diversity go hand-in-hand.

As for what shareholders might think, the nearly 200 companies with at least 20% female directors, as identified by 2020 Women on Boards, feature the most patient and focused shareholders in America. These are shareholders with the longest average holding periods and most concentrated portfolios. Warren Buffett dubbed this cohort “high-quality shareholders” (QSs for short) and evidence shows that high densities of QSs in a company are associated with superior corporate performance.   

The Quality Shareholders Initiative at George Washington University ranks more than 2,000 large public companies by QS density, including most of those identified by the 2020 Women on Boards as having the greatest percentage of women directors.  Among those, 70% are in the top half for QS density and 15% are in the top decile. Here’s a short list:

Alliant Energy
LNT,
+1.47%

 

American Tower
AMT,
-2.47%

 

Arthur J. Gallagher & Co.
AJG,
+0.13%

 

Eli Lilly & Company
LLY,
+0.24%

 

Estee Lauder Companies
EL,
-0.01%

 

International Flavors & Fragrances
IFF,
+1.26%

 

Johnson & Johnson
JNJ,
+0.79%

 

Kaiser Aluminum
KALU,
+2.38%

 

PepsiCo.
PEP,
+0.00%

 

Stryker Corporation
SYK,
+1.69%

Sysco Corporation
SYY,
+2.21%

 

Concerning Black directors, the Quality Shareholders Initiative crunched the data from Institutional Shareholder Services of S&P 500 companies. One notable finding: a select group of such companies boasts three Black directors over the past few years, all representing at least 20% of the board. Every one of those companies ranks in the top half for QS density, including these:

AFLAC
AFL,
+2.34%

 

DTE Energy
DTE,
+1.29%

 

Eversource Energy
ES,
+0.91%

 

Marriott International
MAR,
+5.95%

 

Nike
NKE,
+0.45%

 

Omnicom Group Inc.
OMC,
+0.15%

 

Public Service Enterprise Group Inc.
PSE,
+3.83%

 

Salesforce.com
CRM,
-1.79%

 

Southern Co.
SO,
+2.87%

 

Verizon Communications
VZ,
+1.02%

 

WEC Energy
WEC,
+0.70%

 

What might explain these associations? The correlation between QS density and diversity, of both gender and race, may be due to the long-term horizons of QSs. Compared to the short-term view of transient shareholders, QSs benefit more from the multiple viewpoints on boards that come from diversity. 

The association between QS density and multiple Black directors on a board may reflect the focused investment approach of QSs. Indexers, who own small stakes in every company, may have to be content with quota-type guidelines advocating one minority director per board. QSs, who focus on particular companies, care about individual identities, which may result in greater diversity than a quota system would yield.  

There may be a long way to go on board gender and racial diversity, and it remains true that the social case is stronger at present than the economic one. Everyone also agrees that director quality remains paramount. But these observations do suggest that America’s best shareholders and board diversity go hand-in-hand.

Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University.  He owns shares of Berkshire Hathaway. His new book is Quality Shareholders: How the Best Managers Attract and Keep Them.  Register for his upcoming free book talk, hosted by the Museum of American Finance and Fordham University here.

More: Wanted: Stock investors with time and money to support profitable, well-run companies

Plus: Here’s evidence that putting customers and employees first turns out to be profitable for a company’s stockholders too



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These money and investing tips can help you stay upright against the market’s headwinds

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, can give you greater knowledge about the financial markets’ current condition as you monitor your portfolio and plan ahead. Plus, check out several short videos about whether to include bitcoin and other cryptocurrency in your portfolio and how to go about it if you do.

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Opinion: I took advantage of the 2020 RMD rule but now my 1099-R looks wrong — what should I do?

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Q: I took advantage of the 2020 RMD rule and returned what I had taken from my IRA thinking there would be no taxes. I just got a 1099-R showing the full RMD. That can’t be right. How do I correct it?

—Pauline

A.: Pauline,

If the 1099-R is incorrect, you will need to contact the firm that issued the statement to get it corrected. However, the 1099-R is probably correct.

Read: Are there new RMD rules this year?

Under the law, the firm issuing the 1099-R has no responsibility for reporting how much of a distribution is taxable. That responsibility rests on your shoulders as a taxpayer. The issuing firm need only report what was paid out of the IRA on 1099-R.

Not sure where to retire? Let us help you find the right spot

That does not mean you will pay any tax. Any funds returned to the IRA by Aug. 31, 2020 is considered a rollover and is not taxable. Normally, Required Minimum Distributions (RMD) are not eligible for rollover, but IRS guidance after enactment of the CARES Act that waived RMD for 2020 changed that. The guidance stated the normal 60-day time limit for rollovers would not apply and instead instituted a fixed deadline of Aug. 31, 2020 to return such distributions and avoid taxation.

Read: It’s not too late to save on your 2020 tax bill — here’s how

I get similar questions about 1099-Rs every year. The reporting of the gross distribution looks like an error but in most cases, it is correct and the person receiving it simply hasn’t learned how it is accounted for yet.

Here’s how the accounting typically works.

As with any gross amount reported on Form 1099-R, you declare the amount that is not taxable when you file your 2020 tax return. What I hear most tax preparers would do in your situation is put the gross distribution amount from 1099-R on line 4a as per the normal procedure. Then, they would place a zero in 4b of your Form 1040, and put a note on the return near those lines that it was “returned to the IRA under the CARES Act,” “CARES Act rollover,” “CARES Act,” or simply “Rollover.”

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If you did not return all of distribution by the deadline, the portion that was not returned would be taxable. You would put that number on line 4b.

Read: 5 things to do if you inherit a Roth IRA

As I mentioned a moment ago, the discrepancy between the gross distribution reported and what should actually be taxable comes up in other situations. Three of the most common are other rollovers, Qualified Charitable Distributions (QCD), and distributions from accounts that had received after-tax contributions.

In all those cases, the reporting process looks like what I described above. You put the gross distribution on line 4a and the taxable portion on Line 4b. Then note why the numbers are different with “rollover,” “QCD,” or “See Form 8606” on the 1040. Form 8606 is the form used to determine the taxable amount of an IRA distribution when nondeductible contributions have been made to any of one’s IRA accounts.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.

Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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Video: Why Mike Novogratz sees bitcoin reaching $500,000 by 2024

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Galaxy Digital’s Mike Novogratz explains the outlook for crypto as Coinbase goes public.





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