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Shareholders should decide the makeup of who runs companies

Governments have an obvious responsibility to monitor the operations of both public and private companies for compliance with laws crafted to protect investors, customers and employees. That oversight should not extend to dictating who leads those businesses.

Democrats in the state House are offering a proposal to require Michigan-based corporations to count the number of women on their boards and in executive suites and include that accounting in their annual reports to the state.

The bill, sponsored by outgoing Rep. Padma Kuppa, D-Troy, was introduced last year but went nowhere in the Republican-controlled Legislature. With Democrats having won the majority of both the House and Senate, it is destined to be revived in the new session.

The bill includes recommended quotas for female representation on boards of directors: at least three for boards of more than five members; at least two for boards with five members, and at least one for boards with fewer than five members.

Female is described as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.”

It is not a mandate at this point, but rather a reporting requirement. Companies that fall short of the recommended threshold would have to explain why, and what they’re doing to comply.

Several Democratic-led states, including California, New York, Illinois and Washington, have passed similar or stricter measures. California’s law mandates boards include women and members of under-represented groups but is on pause pending appeal of successful legal challenges.

The federal Securities and Exchange Commission already requires publicly traded companies to explain how diversity goals affect the board nominating process. Since 1966, the Equal Employment Opportunity Commission has required workforce diversity reports of all companies with more than 100 employees.

NASDAQ also recently implemented diversity reporting requirements for members of its exchange and demands an explanation for why boards don’t contain at least two diverse members.

In addition, shareholder groups and investment firms increasingly insist on diversity on the boards of companies whose shares they buy.

Investors are the most effective regulator of board make-up. If shareholders, who are the owners of a corporation, find diverse boards add value they will install diverse directors. Another layer of reporting requirements and paperwork demanded by the state will not be nearly as effective as action by the shareholders themselves.

In the California challenges, two courts ruled the state failed to prove the laws were narrowly tailored to remedy specific harms. Without proof of harm, the courts determined the state did not have a compelling interest to issue mandates on board make-up.

Michigan’s law is not a mandate, but it, too, falls short of the mark of addressing a specific harm that compels the state to act.

This proposal to make state government the corporate governance diversity police should remain on the shelf.

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