No More Old Boys’ Club: Institutional Investors’ Fiduciary Duty to Diversify Corporate Boards

Posted: 21 Nov 2019 Last revised: 13 Feb 2020

See all articles by Anat Alon-Beck

Anat Alon-Beck

Case Western Reserve University School of Law

Darren Rosenblum

Pace Law School; University of California, Berkeley - Berkeley Center on Comparative Equality & Anti-Discrimination Law

Michal Agmon-Gonnen

District Court of Tel Aviv - Commercial Department I; Tel Aviv University - Buchmann Faculty of Law

Date Written: November 19, 2019

Abstract

One of the highly contested issues today in corporate law and governance revolves around boardroom diversity, with an emphasis on gender diversity. In recent decades, unfortunately, despite the fact that women’s economic and political status have advanced significantly in the United States and around the world, women have yet to achieve parity with men on issues concerning representation and participation in the corporate world.This is evidenced by the stark lack of representation of female directors in the boardrooms of major public and private corporations.There are increasing calls for action from various groups, including academics and regulators. The following are some of the theories (rationales) calling to promote the election of women as directors, such as social issues, public good, organizational strategy, fair employment practices, and corporate governance. Such theories focus on the advancement of women and narrowing the gender salary gap, women’s contribution to society and the corporation (board of directors), diversity in the boardroom, taking stakeholder interests into account (employee motivation and improving customer loyalty), and even empirical studies that show that there is a direct correlation between having a certain percentage of women on the board and enhanced corporate (economic) performance.Some believe that this issue should be addressed through legislation and diversity initiatives. For example, there is an increase in quotas, regulation initiatives, the use of ESG disclosure requirements and soft law instruments (such as stewardship codes).

This paper will review the recent rise (over the last twenty years) of institutional investors, who own an increasing share of public equity markets on the one hand, and the need to elect women to the boardroom on the other. The main argument is that institutional investors have a fiduciary duty to advance the goals of their beneficiaries (the individuals who invest in these institutions). Managers of financial institutions are subject to various enhanced fiduciary obligations, which require them to take board diversity concerns into account, due to the fact that they are serving as stewards to their beneficiaries and the portfolio companies.

In light of the duties of the board of directors, the current regulatory framework, (and shifts in institutional investors market and legal powers), institutional investors have a duty to take into account the question of women representation in the boardroom in the corporations in which they invest. They also need to consider generally the ways in which they vote on appointment of directors to the board.There are several ramifications for breaching a fiduciary duty, such as litigation involving derivative actions, claims for breach of fiduciary duty, or proxy violations on behalf of individual (and/or institutional investors). These claims in the USA, for example, can be brought in state or federal courts (depending on the nature of the claim).

Suggested Citation

Alon-Beck, Anat and Rosenblum, Darren and Agmon-Gonnen, Michal, No More Old Boys’ Club: Institutional Investors’ Fiduciary Duty to Diversify Corporate Boards (November 19, 2019). Case Legal Studies Research Paper 2019-22. Available at SSRN: https://ssrn.com/abstract=3489927

Anat Alon-Beck (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States
2163683311 (Phone)

Darren Rosenblum

Pace Law School ( email )

78 North Broadway
White Plains, NY 10603
United States
914 422 4663 (Phone)

University of California, Berkeley - Berkeley Center on Comparative Equality & Anti-Discrimination Law

Boalt Hall
Berkeley, CA 94720-7200
United States

Michal Agmon-Gonnen

District Court of Tel Aviv - Commercial Department I

Tel Aviv
Israel

Tel Aviv University - Buchmann Faculty of Law

Ramat Aviv
Tel Aviv 69978
Israel

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