Board Diversity by Term Limits?

Abstract

Four-fifths of the corporate board seats in the United States are held by men and a shocking number of companies lack any female representation on their boards. While institutional investors have pushed these companies for change, California took a more aggressive step and followed several European countries by mandating a quota for board representation. Heated argument has ensued over what diversity we should prioritize and what mechanisms should be used to promote diversity. Yet, could these challenges be avoided altogether, through the use of term limits? This Article is the first academic inquiry exploring the connection between term limits and the sex diversification of the corporate board. Drawing upon quantitative data on director turnover in the S&P 1500 and qualitative data on S&P 500 firms with term limits, our research shows that firms experiencing higher board turnover have more sex diversity. We argue then that term limits, a mechanism that increases turnover, may correlate with improved sex diversity on boards. Our findings suggest that promoting term limits in the U.S. offers a market-based mechanism that could avert these polarized diversity debates.

Keywords: Diversity, Corporate Governance, Directors, Gender Diversity, Term Limits, Corporate Law