Board Best Practices Series: Embracing Diversity in the Boardroom

Board Diversity

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Diversity is strategic.

This axiom has been avoided due to fear, greed, corruption, and ignorance. Diversity heightens objectivity by introducing a wider variety of skills, experiences, and opinions. Prior to 1789, French aristocracy failed to realize the gravity of their arrogance and the singularity of their social and economic viewpoint. Their lack of diversity resulted in the brutal murder of over 30,000 upper class individuals. Imagine if a social revolution in the United States took a mere 10,000 business luminaries—Zuckerberg, Dimon, Iger, Cook, Bezos, Barra, etc., all gone in a matter of weeks. No matter what your opinion of top CEOs is, their contribution is arguably fundamental. A board or board member that avoids diversity embraces ignorance and irresponsibility. Diversity enhances understanding and is critical to board effectiveness.

A good company, like a good nation, should consider whether increased diversity among its leaders will benefit shareholders and stakeholders.

Fortunately, the present call to action among boards that seek greatness is to embrace diversity and realize its benefits, specifically, profit from the difference diversity offers. In our experience working with boards over the past nine years, we have seen clearly that the diverse board is far more strategic and effective. During this Board Best Practices Series and over the next year, we will be closely monitoring and studying how having board members who bring diverse thought, perspective, and experience improve a board’s effectiveness.

America’s economic system is built on democratic principles of freedom, fairness, and representative government. Among the board’s core governance duties is the responsibility to represent shareholder interests. Yet while approximately one-third of shareholder wealth is held by women, women hold fewer than 20% of public board positions.

According to the Boston Consulting Group, between 2010 and 2015 private wealth held by women grew from $34 trillion to $51 trillion. Women’s wealth also rose as a share of all private wealth, though less spectacularly, from 28% to 30%. By 2020 they are expected to hold $72 trillion, 32% of the total. And most of the private wealth that changes hands in the coming decades is likely to go to women.

Another key board responsibility is understanding the company’s positioning with respect to its current and prospective customers. Imagine a company whose customer base is 90% women of all backgrounds and yet the board is composed entirely of white males averaging 65 years of age. This notion is laughable. Yet, this scenario has been the norm. Capitalism commands us to think and act competitively. Strategy is about differentiating from the competition, connecting with customers, and identifying more efficient means of achieving uniqueness. A board composed of highly capable diverse thinkers and leaders seems obvious, but it hasn’t always been the case.

Board Diversity is Advancing, Albeit, Slowly

2020 Women on Boards 2018 Diversity Index reported the number of female directors in the Russell 3000 in 2018 was 17.7%, increasing from 16.0% in 2017.

Much of the change in board composition, albeit slow, had been a response to cultural, social, and investor pressures, and legislated requirements. Since 2015, major institutional investors such as State Street and BlackRock have changed their proxy voting guidelines, demanding more rapid change to board diversity. Take for example the BlackRock 2019 Proxy Voting Guidelines:

We expect boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of competing views and opinions in the boardroom. We recognize that diversity has multiple dimensions. In identifying potential candidates, boards should take into consideration the full breadth of diversity including personal factors, such as gender, ethnicity, and age; as well as professional characteristics, such as a director’s industry, area of expertise, and geographic location. In addition to other elements of diversity, we encourage companies to have at least two women directors on their board.

Facing mounting pressures from many constituency groups, state legislatures are taking action and mandating board diversity. California passed a law that requires public companies headquartered in California to have a minimum of one female on their boards by December 31, 2019, with increasing minimums for larger boards by 2021. Passage of this bill contributed significantly to increasing awareness about the issue of gender diversity on corporate boards. NYC Pension Funds Comptroller Scott M. Stringer has been a strong voice calling for increased transparency, accountability, and diversity on the boards of public companies where New York City invests its pension funds.

The following graph emphasizes how the gender composition of boards compares globally.

Women on Boards – Diversity Around the World

Board GovernanceDiversity is a More Solid Foundation from Which to Build

Beyond merely satisfying compliance requirements, boards are beginning to realize the inherent value of diversity. A board composed of collegial, well-rounded individuals with diverse backgrounds offers elements essential to board effectiveness. Among the hundreds of boards for which we have conducted board assessments, a vast majority of board members actually embrace true, thoughtful, action-oriented diversity. By action-oriented, we mean board members who listen well and actively and comment and question thoughtfully. Recently, a public company board member commented that diversity is more than being able to check all the different colored squares representing personal characteristics and experience and to boast that in their filings and annual reports. Diversity promotes more robust and insightful discussions, and emphasizes the board’s commitment to understanding and representing all stakeholder groups (shareholders, employees, consumers, and customers), ultimately ensuring that the board is adding value toward the company achieving the highest possible shareholder benefit.

Diverse Perspectives: Why?

  • Mitigates “inattentional blindness”
  • Improves bias understanding
  • Augments strategic discussions
  • Reduces risk
  • Defines commitment to stakeholders

Negative bias and inattentional blindness are the enemy of diversity. “Inattentional blindness is the psychological phenomenon that causes you to miss things that are right in front of your eyes.” Almost certainly, inattentional blindness existed in the boardroom and C-suite prior to Lehman Brother’s failure and eventual bankruptcy.

Benefits of a Diverse Board

  • Promotes robust discussion and constructive debate through new and broader perspectives.
  • Optimizes connections for the board through directors’ broader circles and deeper resources for the board to tap into and inform their decision-making process.
  • Maximizes opportunities for innovation and advancement.
  • Minimizes the development of group-think and the possibility of missing major red flags.
  • Promotes a culturally inclusive environment and strengthens global reputation.
  • Passes the “smell test” for progress and evolution.

Making Diverse Perspectives Felt

After a board has determined what new perspectives and characteristics it needs to optimize its functioning and effectiveness, it must shift its focus to making those new diverse perspectives felt. This side of diversity moves from representation to inclusion and speaks to the board’s culture. To analogize, when you pour oil into a bowl of vinegar and add in seasoning, the ingredients remain isolated. However, stirring the contents so that they interact creates a more interesting and vibrant new substance—a vinaigrette. Similarly, boards that add new members but fail to effectively onboard or include them in the culture will not realize the full benefit of the diversity.

Great board culture includes active listening, inquiry, and continuous improvement. Boards, particularly their chairs and other leaders, must make concerted efforts to build respect for diversity and foster a culture of inquiry by acknowledging the benefits of each different personality and a sum that is superior to its parts.

Closing Thoughts: Tearing Down Walls that Prevent Beneficial Evolution

A barrier to expanded economic progress is global businesses’ historical resistance to diversity. Diversity elevates competition, reduces risk, and promotes healthier markets. This plays out in both business and politics. In her 2019 Harvard Commencement address, Angela Merkel reflected that:

The Berlin Wall limited my opportunities. It quite literally stood in my way. However, there was one thing which this wall couldn’t do through all those years: It couldn’t impose limits on my inner thoughts, my personality, my imagination, my dreams and desires.

Women on boards, people of difference, diversity in general are elevating global economic standards. We aren’t talking about diversity for diversity’s sake; we are talking about diversity for prosperity’s sake. Diversity liberates creativity, dreams, desires, and growth. The belief in a universal dream of prosperity should be encouraged for all. Boards hold trillions of dollars of responsibility and influence. Acting diversely is a conviction that many board members now hold dear.

Time will help determine the strategic value of diversity, but early results indicate that diverse boards reflect diverse companies that think and act more nimbly and creatively and are producing superior results.

Resource from Women Corporate Directors 2019

Find the resources for your board to assist in the full scope of governance responsibilities.

 

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