The Board of Directors – Building a Reflective Proxy

A storm of controversy has been raging in the media and executive suites about corporate governance and the roles of boards of directors since the collapse of Enron and WorldCom. The bulk of this haranguing has been around legal and regulatory requirements as a reaction to glaring instances of malfeasance and fraud. The true mettle of a ‘good’ board has nothing to do with laws, statutes or lawyers, but how it functions as a representative body for shareholders in relation to a company’s mission. That means two things: 1) a board member must understand/reflect shareholder interests; 2) a board member must understand/reflect customer interests. Without these two bodies of knowledge, a board member is an empty chair at the table. When the board as a whole does not reflect these two toolkits, shareholders are not being appropriately represented, leading to a new board or a sale of stock.

In the last two decades, much has been made about corporate boards better reflecting society. Women, racial minorities and other under-represented demographics have made strides in gaining access to board seats. Most results are not stunning, with less than 20% of new independent directors being women according to Spencer Stuart. Now, the other 80% may perfectly understand shareholders, but probably don’t understand 51% of the population as well as a woman does. Do boards need to be 51% female? No. That said, there is a statistically significant knowledge gap between 19% and 51%. Shareholders have an incomplete picture of the market in their proxy of a board.

There is very little research surrounding disability and corporate boards. This author suggests that there is a very good reason for that. Board members that bring disability to the table don’t exist. If they do, it is in non-material numbers, or for branding reasons, they choose not to disclose. Disability in a corporate environment is so new, that it has yet to percolate to senior management levels, let alone board constituents. There is a real demographic rationale to have at least one board member with a disability. Between people with disabilities (19%) and their stakeholders (33%), this market is about the same size as women. Invoking the almighty concept of conservatism, let’s assume the demographics are off by a factor of 2, this population is still double the size of African Americans. With that kind of room for error, there is very little risk in adding this constituency from the customer standpoint.

This gets very interesting when one looks at the rationale for shareholders to demand disability as part of its proxy. The top 300 global money managers run approximately $55.5 trillion. These assets come to them from pension funds, mutual funds and other broadly invested institutional funds. Most of these pools have a mandate for returns, along with a loosely defined mandate for investments reflecting the communities they represent. Many efforts have been undertaken by these pools to change the way their investments operate to better serve/reflect their capital sources. Diversity suppliers, increased female representation on boards/senior management, environmental efforts and governance changes are examples of initiatives driven by these community mandates. Note that these changes also add to asset value in the medium- to long-term as well.

From a purely statistical/demographic standpoint, the assets impacted by disability amount to $27.3 trillion amongst these institutional investors. They represent teachers, labor, corporate pensions, and retail investors globally. Again, let’s assume this number is half wrong. That is $13.65 trillion in equity and debt instruments. That’s one hell of a mandate.

What needs to happen to fulfill this mandate? Spencer Stuart states that 70% of S&P 500 firms are seeking women directors, and that 93% of those boards have at least one female member. A good first step is to mirror the efforts for women in disability over the next ten years. Boards need to seek at least one great board member who happens to have(or understand) disability. By ‘understand disability’, this author in not talking about clinical knowledge. This author is referring to market inclusion. What makes this market buy from, identify with and work for an organization? How can a firm apply and extrapolate what it already does to this mammoth and tangible market in a manner that best serves shareholders?

There are some fantastic candidates out there to add real value to boards both cum- and ex-disability. Richard Branson(Virgin), John Chambers(Cisco), Steve Wynn(Wynn Resorts) and David Barger(JetBlue) are just four proven executives who would add to any board of directors. The temptation here is to find a person with a disability and slot them into a seat, without regard to what the individual brings to the room. This is the wrong approach. Dilution of talent for a specific characteristic is never a good path to follow.

Just as great firms are starting to attract talent to their ranks who happen to have a disability, the same must occur at the shareholder proxy level. Both investors and customers will benefit as new initiatives from the line and shareholder are better understood at the board level. Great ideas die if they are not understood. With the change coming around the massive market called disability in the next decade, leadership must be given board support and knowledge to have access to the requisite capital, both human and financial.

These changes won’t come out of governance and legal posturing. This kind of emerging market will only be tapped through expertise and understanding the opportunity from a shareholder prospective. By putting people with disabilities on corporate boards, firms and their management teams get explicit backing from the only reason for existence, their shareholders.