Gender Bias a Consequence of Sarbanes-Oxley Act’s Financial Expert Rule?
Source: Georgia Institute of Technology
In 2002, the federal government mandated that corporate boards of directors include at least one “audit committee financial expert” to help avert future accounting scandals. But the title and description of that position may have an unintended negative effect on the gender diversity of corporate boards, argues Seletha Butler, assistant professor of law and ethics at Georgia Tech Scheller College of Business.
“Although the SEC received extensive comments on the name for the audit committee expert, it settled on the more limiting term ‘audit committee financial expert,’ rather than a more inclusive, descriptive term that encapsulates the scope and function of the Expert Law and the meaning of the audit committee expert,” Butler says.
In her recent lead article in The Georgetown Journal of Gender and Law, Butler describes the creation of this board expert requirement in the passing of the Sarbanes-Oxley Act, which followed a series of serious corporate misdeeds at companies such as Enron and WorldCom. Any company that didn’t add the audit committee financial expert position had to explain why it did not add the position.
While acknowledging that this expert role is an important one, Butler argues that the U.S. securities market would have been better served by calling the position “audit committee expert” or “audit committee accounting expert” instead of “audit committee financial expert.” That is because the latter title’s emphasis on finance dilutes the focus on accounting, auditing and internal controls experience needed to better protect investors, she says.
Gender bias may have resulted from this title because the field of finance is heavily male-dominated, whereas many more women have attained leadership roles in accounting and auditing, Butler explains. During the period 2005-2009, the number of women in the accounting/auditing profession hovered between 60-62 percent, while their presence in the finance field dropped from 39 percent to 31 percent. She lists data showing that many more women earn degrees in accounting than finance.
“The title and the expanded definition for the audit committee financial expert contain a gender bias and have negative inadvertent consequences against women on public company boards of directors….,” Butler writes. “The number of female audit committee financial experts is comparable to the miniscule number of female directors of public company boards of directors.”
One year after the Expert Regulation's March 2003 effective date, 88 percent of the audit committee financial experts were men (12 percent were women).
When creating the audit committee financial expert position, the SEC broadened the qualifications for the job to include candidates who had supervised those responsible for auditing and preparing financial statements – but who had not been directly involved in such work themselves.
“On its face, the inclusion of these individuals with quasi accounting or financial reporting backgrounds does not appear to be the original intent in the Expert Law,” Butler writes.
Removing the word “financial” from the title in question would be of minimal difficulty for the Securities Exchange Commission (SEC), says Butler in her article, titled “Financial Expert: A Subtle Blow to the Pool and Current Pipeline of Women on Corporate Boards.”
But the change could have a positive effect on increasing the diversity of corporate boards, which are still overwhelmingly male and Caucasian, she says. Board diversity is important to reflect the increasingly global business society, she notes.
“Group think” diminishes with diversity, she says, adding that diverse boards are more likely to engage in challenging discussions and not be stacked with “clones” of the CEO. Butler cites a recent Catalyst report indicating that companies with at least three women directors had 84 percent positive return on sales and 60 percent positive return on invested capital.
Butler says she recognizes that increasing board diversity will be an ongoing process, requiring more women to study quantitative fields earlier in life and for corporations to develop pipelines of qualified women candidates and mentoring processes.
She encourages public company stakeholders to maintain consistent pressure on board nominating committees and other decision makers to expand their pool of director candidates beyond current or retired CEOs to include vice presidents, senior attorneys, academics, consultants, nonprofit executives, accountants, and auditors.
Noting that the lawmaking process sometimes overlooks gender bias related to women in the business industry, Butler says her article is a call to action for the public to be informed about and involved with policymaking. Such involvement includes providing public comments to administrative agencies on regulations and requesting that policymakers pre-examine potential consequences of rules, regulations, and policies, making sure that they consider equality.