The representation of women on U.S. boards of directors has surged in recent years. This has been driven by a growing recognition that diversity is good for business, as well as the influence of quotas established by proxy advisory firms, certain state laws, and the advocacy of institutional investors and, until recently, activist shareholders.

Yet the trend has seen a cooling off in recent months.

As of June 23, only 11 women director candidates nominated by activists won board seats at U.S. companies. That’s down from 20 in the same period of 2022 and well below the 26 recorded at the same time in 2020, according to Insightia data.

The numbers match a broader trend. Year to date, 37% of new director appointments overall in the U.S. were women, down from 38% at the same time in 2022 and 40% at the same time in 2021.

Some of the industry’s most dedicated shareholder activists have also taken their foot off the pedal in terms of diversity. This time last year, Carl Icahn had nominated eight women. So far this year, none. Likewise with Elliott Management, which nominated three women in 2022, but none this year.

The heat is off

“Perhaps the heat is off because of the political climate and gains made already at large-cap companies,” said Amy Borrus, executive director of the Council of Institutional Investors in Washington DC.

There has certainly been progress over the last decade. According to Insightia data, the percentage of women directors serving on the boards of Russell 3000 companies grew from 16.5% as of the end of June 2016 to 28.8% in mid-2023.

Yet the numbers reflect the increasingly polarized political environment in the U.S. Among the 25 states with over 20 public companies, more liberal California leads with 34% of board seats held by women and 21% of companies achieving gender balance, according to advocacy group 50/50 Women on Boards.

On the other hand, Republican-leaning Nevada currently has the lowest percentage of women on boards at 24%, down from 25% at the end of 2022. Though Nevada has more gender-balanced companies than Florida, which ranks second to last.

Those politics also led to another development that may have dampened enthusiasm for change: the overturning of a law requiring Californian companies to have at least two women on their boards.

California’s SB 826, enacted in 2018, required California public companies to have at least two female directors if the board is made up of five people or less, or at least three if the board is made up of at least six people. Most controversially, noncompliance could have resulted in a fine of $100,000 for the first violation and $300,000 for each later violation.

That rule was overturned in May 2022 following a lawsuit by legal advocacy group Judicial Watch, with the court agreeing that gender quotas, and especially the fines, were unconstitutional.

“It took us seven years to get that bill enacted, but it only took a few weeks in court to overturn it,” said Betsy Berkhemer-Credaire, CEO of 50/50 Women on Boards, which played a leading role in getting the initial bill passed. The pendulum could well swing back as the court decision will be appealed. According to Berkhemer-Credaire, the revised bill may not include mandated fines.

That would likely be amenable to most institutional investors, according to Borrus.

“CII supports board diversity broadly but does not support quotas for women or any other category,” she said.

Ian Robertson, CEO of Kingsdale Advisors, agreed that regulations are an important driver of change. He noted that in Canada, the number of women on boards has increased as the Canada Business Corporations Act has started to legally require issuers to meet disclosure requirements on certain underrepresented groups.

Changing skillsets

Though in Robertson’s mind, changes in the current economic and stock market environment are also prompting companies to reduce their focus on diversity, at least temporarily.

“There is a recognition that the skillsets needed by directors are changing,” stated Robertson, citing issues like cyber security and, more recently, artificial intelligence. “They need somebody who can do engagement directly with shareholders on those areas.”

That’s not to say that women have less expertise in such areas, he stressed, but companies may be exercising more caution over their director choices.

“It’s a balancing act between meeting that diversity requirement as well as modernizing the skill set of the board for future challenges.”