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Is it time to regulate diversity in the boardroom?Getty Images/iStockphoto

Last month, Facebook took initial steps toward becoming a publicly traded company. If all goes according to plan, its IPO could be the largest in history; some expect a valuation of $100-billion. Having friends is serious business.

Amid these developments, though, certain investors have complained that Facebook's governance structure is less than friendly to women and urged the company to diversify its board. How many of Facebook's seven directors are women? Zero. What group of people makes up a majority of its users? Women.

The homogeneity of the social-media giant's board is not atypical, including in Canada.

Women are more than 50 per cent of the Canadian population and constitute more than a third of our MBAs. But they hold just 10.3 per cent of Financial Post 500 public company board seats and just 3.2 per cent of public company board chair positions. Nearly half of these public companies have no women on their boards at all. The numbers for racialized groups are even worse.

Board diversity is quickly becoming one of the hottest issues in corporate governance. While studies have not established a causal link between diversification and shareholder value, they have documented the benefits of diverse leadership in terms of enhanced decision-making and governance effectiveness.

A Liberal Senate bill introduced last June would address disparities by requiring the boards of publicly traded firms to have at least 40 per cent representation of each gender. This bill mirrors similar initiatives in Norway, France, Spain, Italy, Belgium and Iceland mandating varying degrees of gender representation on the boards of publicly traded companies. This week, the European Commission said it is studying mandatory quotas as a way to speed up the representation of women on corporate boards.

Quotas are controversial and may not be the most politically viable way to address inequality. Indeed, key players on Canada's corporate governance stage have opposed them. But the numbers show it is time to move beyond voluntary initiatives and begin a serious exploration of regulatory options. There are some significant alternatives to quotas worth considering.

Recent changes to U.S. securities law, for example, require publicly traded firms to disclose to regulators and investors whether issuers consider diversity in identifying nominees for directorships. One rationale of this disclosure model is that exposure will lead corporate actors to pursue corrective measures.

While it is too early to tell whether these enhanced disclosure requirements will have a direct impact on board representation, there are lessons we can learn. The U.S. provision does not define "diversity." Nor does it require firms to consider diversity in nominating directors; firms must simply describe whether they do, and if so, how.

This has led to some disclosures that are likely to leave diversity advocates unsatisfied. Consider Berkshire Hathaway's: "Berkshire does not have a policy regarding the consideration of diversity in identifying nominees for director. In identifying director nominees, the … committee does not seek diversity, however defined."

Despite the weaknesses of the U.S. regime, it is a move in the right direction. Canadian securities regulation currently requires firms to report on the process by which boards select new candidates. But the only mention of diversity exists in guidance suggesting that issuers contemplate whether their board considers "diversity of experience, background and views" when considering candidates.

Canadian regulators can learn from and improve on the U.S. experience, as well as looking to other countries for guidance. In Australia, firms are asked on a "comply or explain" basis to disclose the proportion of women on the board and to establish a policy that includes measurable objectives for achieving gender diversity. That policy, or a summary, must be disclosed and diversity is defined as including "gender, age, ethnicity and cultural background."

Expanding our thinking to consider the potential role that stronger disclosure requirements can play in facilitating diversification would be an important first step in establishing a more inclusive Canadian corporate governance landscape.

Aaron Dhir is a professor at Osgoode Hall Law School, York University, and served as 2011 scholar in residence with the Law Commission of Ontario. He is writing a book on corporate governance and diversity.