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 Governance

Diversity 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.

Call us at 800.645.1976 with governance questions about:

Business influencers have been increasingly vocal about board diversity. The debate has primarily focused on: gender, age, and ethnicity. Having a board that reflects and understands the values and perspectives of your organization’s current and future customers is essential to sustaining organizational relevance. Board and executive leaders must promote diversity of perspective when considering who is best qualified to meet the leadership needs of their organization.

Following the European Union’s boardroom gender diversity mandate, California passed Senate Bill 826, requiring public companies based in California to have at least one woman on their boards by the end of 2019. According to Forbes, nearly  40% of new directors on Fortune 100 boards in 2016 were women, but women are still woefully underrepresented on boards. According to executive search firm Stanton Chase, diversity contributes to strategic value, brand perception, and benefits a company’s bottom line making gender diversity “a strategic investment”.

Board member age has been an aspect of diversity rarely considered or challenged in the past. A vast majority of public and private equity backed directors tend to be white males above the age of 50, often the result of a recognition of their time-earned expertise and reputation in their professions. These are important characteristics; however, there is a need to consider the multifaceted nature of expertise that is not solely gained through years of experience.

Organizations must adopt a well-rounded view in considering how to have diverse view points around the table to adapt to the current disruptive and innovative business climate. For example, research conducted by MNI Targeted Media shows that millennials now represent the largest consumer spending group in the United States (accounting for 40% of all spending). Having insights into millennial’s priorities at the board and executive level will provide for a competitive and forward-looking perspective, which is now being recognized by some leaders. According to PwC’s Census of Directors 50 and Under, 90% of directors say that age diversity is important. As technology continues to disrupt at an increasing pace, having younger members may assist the board’s effort to look forward and around the corner of the competitive landscape. Qualified younger members understand innovation and digital transformation and bring an otherwise missing perspective to the decision making process.

Finally, ethnicity and race continue to be an important topic in the discussion about diversity as demographics continue to change globally. The U.S. Census Bureau estimates that by 2050, the country’s population will have grown by approximately 75 million people, and those residents will have a vastly different racial profile than today’s population. The changing demographic trends require that companies change as well, or then risk becoming irrelevant. Through boards around the world, we gain insights into the changing perspectives on diversity.

During a recent assessment interview with a 60+ year old white, male, Fortune 500 director, he shared that his opinion of the importance of diversity has dramatically changed. Whereas he thought it was a political or social issue ten years ago, he and many of his colleagues are witnessing the benefits of diversity represented on the boards they serve today. He noted that he enjoys the meetings more, appreciates the diverse perspectives, and believes the board’s performance is improving. By starting with transformation in the boardroom, leading organizations are dedicating resources to ensuring that they holistically represent their customers, employees, shareholders, and other stakeholders.

What are the benefits of a diverse board? Having a board comprised of diverse gender, age, race and ethnicity:

  • Promotes a more multifaceted discussion of strategy and the competitive landscape.
  • Brings in new and broader perspectives.
  • Optimizes members’ diverse backgrounds, creating new connections for the board. 
  • Maximizes opportunities for advancement – especially in technology and innovations.
  • Minimizes the development of “Group Think.”
  • Promotes a culturally inclusive environment that is attractive on the global stage.
  • It’s the right thing for culture progress (passes the “smell test”).

More on board diversity

In his article, “Reboot, Not Refresh”, published in International Banker, our CEO, Byron Loflin, writes about diversity and optimizing board composition.

Discover how our partner, Stanton Chase, a global specialization leader is the top diversity and inclusion executive search firm.

Does your board have strong governance practices to effectively oversee your organization? “Finally, board chairs and investors are pointing towards corporate-governance excellence as key to long-term value creation and economic stability. Corporate governance is now a top priority for BlackRock, State Street, Vanguard and others.”

As research emerges linking governance and diversity to performance, board members are called on to react. But how?

Byron Loflin, CEO of the Center for Board Excellence, suggests that a reboot is in order: a recalibration of the board’s composition and an assessment of its responsibilities and direction. Boards must undergo a complete reboot of who they are and how they operate to achieve governance excellence. Read the entire article here.

As boards today face issues related to growth, globalization, and technological change, board refreshment is becoming more and more critical. The model of board-member-for-life — the proverbial pale, male, and stale — is likely to miss the boat as far as possessing the skill set and familiarity needed to address emerging crises and changes in investor and customer profiles. In fact, any board that defaults to the status quo and does not plan for the future is notholding its own; it is actually falling behind.

In a February 2016 article in Agenda, I address how board refreshment is crucial not only for a company’s effectiveness and survival in a changing world, but for protecting it from encroachment by activist investors and other outsiders. The skills that any board should comprise in order to be able to position the company for growth include:

  • IT strategy
  • Cyber-security understanding
  • Financial expertise and independence
  • Understanding of business and customers
  • Demographic understanding
  • Social media insight
  • Geopolitical expertise
  • Open-mindedness
  • Self-awareness

(Agenda, February 2016)

Some skills that are critical in cultivating new board members are those on the forefront of new technologies. It’s essential to not simply catalogue the tech know-how a board needs, however. These skills need to be paired with an ability to contextualize how they can move the company forward strategically and compete in current market environments.

A key starting point is board self-awareness. Are the directors as a group addressing current and future needs of the company? Are they responsible stewards, able to communicate effectively with the technical officers and the CFO? Are they aware of their responsibility for ensuring compliance with reporting and regulatory agencies?

If not, it may be time to make room for fresh perspectives, especially ones that reflect a more technologically adept and more diverse demographic. Millennials are comfortable with the rapid pace of change in technology and social constructs, both of which impact a company’s customer base. They also embody a new approach to entrepreneurship, often melding social media and cyber-savvy with social consciousness and a greater openness to diversity.

Diversity embraces race, ethnicity, age, and gender, but it is not an end in itself. Rather, its value lies in how it brings fresh perspectives to the table that probably would not arise from a more homogeneous group.

Board Refreshment Checklist

Below is a checklist for the board assessment process to help directors ensure that refreshment is addressed on a regular basis.

  • Conduct an annual board peer assessment that incorporates a skills matrix as a tool to evaluate each board member’s contributions and to expose skill and diversity gaps on the board as a whole;
  • Reinforce that the purpose behind the assessment is to identify areas that need improvement, create dynamic dialogue, and lead to action items for the board as a whole;
  • Watch industry trends to get a sense of what skills will be needed in the future;
  • Involve the CEO and top managers in the process;
  • Determine what is needed in terms of board education.

In 2000, few people could imagine the 2008 financial crisis, the explosion of 3-D printing, or the rise of cyber-security issues that corporations face today. Similarly, today’s board of directors cannot know what its company will face in the future.

By including ongoing board refreshment and a regular review of the board’s skills matrix, however, it can include individuals with up-to-date skills and industry insights who can ensure that the board — and the company — are on the path of continual improvement.

As technology has brought increased awareness of individuals and their public identities and reputations, it has also brought greater access and understanding of the interworking of organizations and the people that run them. Perceptions of corporate boards as “Oz” like institutions have dissipated, and people have come to understand that board members are people with individual characteristics and defining qualities.

The traditional homogeneity of corporate boards faces increasing criticism. A corporate board not only has an identity as a whole of being a governing/supervisory body, but now also reflects the composite of the identities of the individuals serving as board members. Members of the public who are customers, clients, and stakeholders of these organizations expect boards to be conscious of their total and individual identities and regularly evaluate and make concerted efforts for self-improvement.

Over the past decade, the pressure to increase female representation on boards has continued to mount. Approaches to effectuating this change vary. Some countries regulate the minimum percentages of female board members.

  • Norway was the first country to pass a female board member quota law requiring all public limited liability companies to have at least 40% women on the board or risk dissolution.
  • Similarly, Spain, France, Finland, and Iceland set their minimums quotas of female board members at 40%. Denmark also requires a 40% minimum, but does not attach sanctions to the requirement.
  • Italy, Belgium, the Netherlands, Malaysia, and most recently Germany all require 30% or more female representation. Sweden and the United Kingdom do not have binding minimums, but set goals to increase female participation.
  • The United States has a minimally instructive rule for gender diversity on boards through the Securities and Exchange Commission, which requires boards to disclose how they consider diversity when choosing board members.
  • European nations lead gender parity rankings with all of the aforementioned EU nations having well above 20% and some reaching 40% of board seats held by women. Growth in the United States has been significantly slower, with only about 10.7% female representation on boards of 6,920 companies according to Catalyst (a nonprofit research firm studying women in business), but with about 19.2% percent of women on the boards of S&P 500 companies.

Quotas are effective in increasing the number of women on boards according to Dan Konigsburg, Deloite Global managing director in “Deloitte’s Women in the Boardroom: A Global Perspective”; however, they are subject to criticism and raise questions regarding the qualifications of women being elected to some boards, especially those in male-dominated industries.

The idea that there are not a sufficient number of qualified women to serve on boards has been rebuked on a number of fronts. Instead, the quotas and policies behind them and thought leadership influencing this change increasing female presence on boards challenge a long-standing, unsavory status quo and open networks of highly qualified women to join the ranks of their male counterparts on boards.

Board directors increasingly are recognizing the imporatnce of diversity. PWC confronted the thoughts and perspectives regarding diversity on boards in their 2015 Annual Corporate Directors Survey.

  • In surveyed directors, over 95% viewed diversity as at least a “somewhat” important director attribute, but 70% of directors also believe there are impediments to increasing board diversity.
  • Interestingly, PWC discovered that over 67% of mega-cap company directors think diversity is “very important” to board composition, contrasted with only 31% of directors at micro-cap companies granting diversity that same ranking, which raises questions about smaller companies’ recognition of the benefit of increased diversity.
  • Further, a vast majority of directors (over 80%) believe diversity enhances board effectiveness and company performance.

Recent research shows that companies are more profitable and have higher market performance when women are on boards. An article in the Academy of Management Journal featured the results of such research combining results from 140 studies, which highlighted better prerformance based on an internal view on asset utilization and income generation and on an external view on perceptions and stock performance when women are on boards. The differing experiences, backgrounds, and communication and interaction styles of women enhance all functions of boards through more productive and effective deliberation and keener oversight from a broader viewpoint and expertise.

“The idea is that when a group is held to a higher standard of accountability, it will draw on the knowledge of everyone in that group, leading to better decision making” said Corienne Post, PhD., a professor at Lehigh University and author of the article. This negates traditionally held notions that there exists a largely unsuitable pool of diverse candidates and instead points to either a board’s inability or unwillingness to recognize a major weakness, which can be easily remedied through board evaluations. It may require thinking outside of the restrictive traditional confines of director eligibility and recruitment pools to ensure boards are properly constituted with appropriate gender representation.

The ideals of increased accountability and efficacy of boards are at the basis of the continued efforts to increase gender parity on boards. Boards are required to be cognizant of diversity matters and reputation based thereupon in order to remain competitive. Through proper board and peer evaluations, boards can assess strengths and weaknesses of the board as a whole and of each individual director to determine the number and expertise of female directors necessary to enhance their ability to properly govern and lead their organizations to higher successes.

Just as you would not stock your football starting line-up with all kickers, the notion of boards continuing to be comprised of all or an overwhelming majority of men is similarly absurd.

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