As anyone who has lived in the United States over the past several decades knows, this is an increasingly diverse country. Although this increased diversity is reflected in all walks of life, the diversity of mutual fund boards generally lags that of the general U.S. population and of the mutual fund shareholder population. Studies have suggested that diverse groups generally make better decisions than homogenous ones. This article is not, however, intended to debate the merits of diversity on mutual fund boards. It is indeed our experience that mutual fund boards, when looking to fill vacancies on boards, typically actively seek diverse candidates for such positions; it is also our experience that many boards have difficulty identifying a diverse pool of candidates for such positions.
We believe that the difficulty boards have in identifying candidates stems from one particular criteria used by the vast majority of mutual fund boards that unnecessarily limits the number of qualified diverse candidates for open board positions: Age.
On most mutual fund boards, members serve while they remain in good standing until they reach a pre-determined retirement age. Thus, for a board with a retirement age of 75, hiring a board member in his or her 40s could mean a 30-odd-year commitment to that person. In addition to the stakes of such a long-term commitment, boards may rightfully be concerned that such long-standing board members may become entrenched or less “independent” (in the non-legal sense) of the fund sponsor over time. These theories may explain why statistical and anecdotal evidence indicate that boards rarely consider individuals much younger than 50 for board positions.
If instead, boards used an “either/or” approach, coupling retirement ages with term limits (e.g., board member serves until age 75 or 20 years of service, whichever comes first), boards might be less cautious about interviewing younger candidates. As we will discuss, simply based on changing demographics in the United States over time—including the changing demographics of college and graduate school graduates—considering younger candidates axiomatically means looking at a more diverse pool of candidates.
Current Board Diversity
The diversity of the average investment company board is unlikely to reflect that of its shareholder base or the general U.S. population. According to various studies, the average board member is 65 years old, only 18% of board members are women and, while there is not much published data related to the ethnicity of board members, commentary from the producer of a leading study on board governance practices has noted that the proportion of minority board members is lower than the proportion of female board members. Additionally, one-quarter of fund boards does not have a single female member.
These numbers stand in stark contrast to the profile of the average fund investor. While new board members are younger than the average board member, with an average age of 52, the average fund investor is 51 years old, and 82% of fund investors are younger than 65. Investment decisions are made by women (or are made jointly with a male spouse) 74% of the time, and women make up 50.8% of the U.S. population. Further, 21% of fund investors and 22.3% of the U.S. population identify themselves as minorities.
SEC Disclosure Requirements
While, as stated above, this article is not intended to debate the merits of the value of diverse board composition, it is important to note that as a legal matter, boards need to be prepared to disclose the manner in which they consider diversity in filling board vacancies. Since 2010, Item 407(c)(2)(vi) of Regulation S-K has required registered funds to disclose, in proxy statements related to the election of board members, whether a board considers diversity in identifying nominees for director and, if there is a policy with regard to considering diversity, to describe how the policy is implemented and how the effectiveness of the policy is assessed.
The Securities and Exchange Commission chose not to define the term “diversity,” stating in the adopting release that “companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin.” Thus, fund boards are left to define diversity for themselves; this article focuses on race and gender diversity.
Youth, Diversity Go Hand in Hand
Recruiting younger board candidates may improve fund board diversity in terms of gender and race (in addition to age). Notably, there are a number of educational and societal trends that make younger board candidates more diverse than they may have been in previous generations. In terms of education, the table below compares the academic years ended in 1970 and 1977 with the academic year ended in 2013, showing a trend of women and ethnic minorities receiving an increasing proportion of total degrees and total business degrees issued by U.S. higher educational institutions. 
(8.7% of all business-related bachelor’s degrees)
(48% of all business-related bachelor’s degrees)
(business degree information not available)
(33.3% of all business-related bachelor’s degrees)
(3.6% of all business-related master’s degrees)
(46.1% of all business-related master’s degrees)
(business degree information not available)
(37.1% of all business-related master’s degrees)
Professional (or doctoral) degree
(1.6% of all business-related professional degrees)
(43.2% of all business-related professional degrees)
(business degree information not available)
(34.8% of all business-related professional degrees)
These statistics reflect a long-term trend of women and minorities making up a greater proportion of the educated population, including those with business-related degrees and especially with respect to graduate degrees. This indicates that there are more younger women and minorities (i.e., those currently in their 40s) who are more likely to have the basic skill set to be qualified board candidates than in prior generations (i.e., those currently in their 60s).
Myth of the Retired Board Member
Obviously, boards are hiring an individual, not a statistic, and there are many factors that are worthy of consideration. It may be, ultimately, that an older candidate is preferable to a younger candidate due to the depth of his or her business experience or a number of other factors that are completely divorced from diversity. That said, when boards limit their search to people in a particular age range, they are effectively concluding that age trumps those other considerations, by not even considering candidates outside that range. Put another way, age, experience, diversity, time commitment and other factors are all potentially relevant factors in filling a board vacancy. By limiting the age range of candidates, boards are (we suspect unknowingly in every case) engaging in a determination that age is a more important factor than diversity. People familiar with the law of disparate impact will easily understand that a race- and gender-neutral practice may nonetheless have race or gender implications.
We alluded to the time commitment required of board members as a factor above. The most common objection we have heard to our proposal is that boards prefer older individuals because they have the time to devote to being a board member. Younger candidates are more likely to be employed (and advancing in their career) and may have young children, the argument goes. While that is no doubt generally true, we also all know that different people have different definitions of whether they are too busy to take something on. Furthermore, the statistics do not bear out that boards are seeking to maximize time availability over other factors. According to recent data, 46% of current independent board members are active full-time employees and only 32% are retired. Again, while time commitment is an extremely important factor to consider in choosing board members, assuming that a one-to-one correlation exists between age and time commitment has a disparate impact on the number of qualified diverse candidates a board will see in its search process.
Steps Boards Can Take
Of course, there are many steps a board can take to increase its ability to seek diverse candidates for board vacancies. For example, many boards rely on their informal personal networks (and the networks of key service providers, such as the investment adviser, fund or board counsel, and the independent auditors) to identify candidates. Boards and professional service firms that are themselves not diverse may not have diverse networks of contacts. Many boards combat the undesirable consequences of these network effects by utilizing search firms, either to conduct the search or supplement their search.
As we have argued, if boards begin to consider younger candidates, we believe they could unlock a new pool of diverse and qualified board members. As noted above, a common concern with recruiting younger fund board candidates is the fear that they could serve for too many years. Fund boards typically take three approaches to limit the length of service of board members:
- An age limit,
- A term limit, or
- Some combination (age or a set number of years, whichever comes first).
We believe the age limit approach—which, in our experience, is by far the majority approach in the fund industry—has the effect of limiting the ability of fund boards to find qualified women and racial minorities to serve on fund boards. Thus, we suggest that boards consider the “either/or” approach that couples age limits with term limits. Currently, the average tenure of board members is 20 years, which could serve as a starting point for determining a reasonable term limit. Even if such an approach did not lead to more equal representation of women and minorities on mutual fund boards, it seems to us that it would lead to more equal opportunities.
Rajib Chanda is a partner in the Washington, D.C., and New York offices of Simpson Thacher & Bartlett LLP. His practice focuses on all aspects of issues facing registered investment advisers and sponsors of registered funds, as well as boards of directors of such funds. Christopher Healey is an associate in the registered funds practice in Simpson Thacher’s Washington, D.C., office.
 U.S. Census data released on June 25, 2015 shows that 44.2% of “millenials” (born between 1982 and 2000) are minorities, compared to 21.7% of people age 65 years and older. Looking toward the future, more than 50% of U.S. children under the age of five are minorities. See Millenials Outnumber Baby Boomers and Are Far More Diverse, Census Bureau Reports (June 25, 2015), http://www.census.gov/newsroom/press-releases/2015/cb15-113.html.
 See, e.g., How Diversity Makes Us Smarter, Scientific American http://www.scientificamerican.com/article/how-diversity-makes-us-smarter/ (summarizing various research findings of how diversity impacts decision making).
 See MFDF and Management Practice (MP), Mutual Fund Director Compensation: The 2014 MP Annual Survey, May 13, 2014 (“MPI Study”).
 The average age of a new board member is 52 years old. See MPI Study.
 See Age, Term or No Limits for Mutual Fund Trustees, http://production.mfgovern.com/content/view/41/95/.
 See Women Scarce on Boards, But It Helps to Have One as Chair, Ignites (May 20, 2014), http://www.boardiq.com/c/890604/84844/women_scarce_boards_helps_have_chair.
 See Profile of Mutual Fund Shareholders, 2014, Investment Company Institute, available at http://www.ici.org/pdf/rpt_15_profiles.pdf, U.S. Census People QuickFacts (2014 estimate), http://quickfacts.census.gov/qfd/states/00000.html.
 See Digest of Education Statistics, National Center for Education Statistics, https://nces.ed.gov/programs/digest/current_tables.asp. This source does not provide information regarding conferral of degrees to minorities before 1977. Percentage of all business degrees issued to minorities excludes degrees issued to non-resident aliens—business degrees issued to minorities and non-resident aliens totaled 37.5% of bachelor’s, 46.5% of master’s and 52.9% of professional or doctoral degrees issued in 2013.
 See Considerations for Board Composition: From Recruitment Through Retirement, Investment Company Institute (Oct. 2013), http://www.idc.org/pdf/pub_13_considerations_board_comp.pdf.
 See id. (21% of fund complexes utilize search firms to suggest board candidates).
 See MPI Study.