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Moving the Needle on Board Diversity

 


The Corporate Board Magazine | September 10, 2015


After years as a topic of discussion, corporate board diversity has improved - a bit. However, the standards used to gauge board diversity have also shifted. Companies that hope to lead on diverse boardrooms must look beyond simple numbers and quotas, and embrace a wider concept that includes new populations and systematic change.

There is not a board in the world that does not some­how embrace the concept of diversity. After all, the Platonic ideal of the board is a place of robust and productive debate, where the best minds representing a variety of perspectives come to a shared understand­ing of how to move an organization toward success. Companies and shareholders all over the world have moved toward the belief that boards should more closely reflect the richly varied human race.

The devil, as always, has been in the details. By their very nature, boards can be static entities-extremely selective, with relatively infrequent turnover. Direc­tors are drawn from small circles of highly qualified people, and those groups have traditionally had even fewer members of underrepresented populations than the overall executive ranks.

Companies are challenged to fulfill a variety of board diversity criteria, while still satisfying demanding experience and skills mandates.

Complicating the picture even further has been a more multifaceted definition of diversity. At first, the primary momentum was around placing women on boards, and this remains a key focus in many jurisdictions. Ethnic diversity then became a central issue, and more recently LGBT representation has begun to surface as a concern. In Europe and Asia, achieving nationally varied boards has become important. Companies are now challenged to fulfill a variety of criteria, while still satisfying demanding experience and skills mandates.

While this task may seem daunting, leading-edge boards are demonstrating new strategies to bring true board diversity into reality. They are not just "checking the box" of finding diverse people-they are re-imagining their processes and culture to create a board that by its very nature encompasses a wider array of figures.

Leading boards have come to discuss board diver­sity in the same language as financial diversification, a proven strategy that reduces risk and volatility while driving greater return on their (human) assets. By doing so, they are supercharging board performance, as the more thoughtful and robust approaches be­ing employed have greater board effectiveness as a happy byproduct.

The case for board diversity begins by looking at boards as working teams. A recent Deloitte study established a link between diversity in teams and the ability to avoid groupthink-crucial for boards seek­ing to implement balanced governance. Research by Russell Reynolds has even been able to link a more inclusive mindset to improved stock performance. Could a more inclusive board actually drive better company performance? The notion is tantalizing. As an additional benefit, the follow-on effects of a more diverse board are felt throughout the organiza­tion-both Russell Reynolds and EY have linked board diversity to a more diverse C-suite.

However, the reality of board diversity is that significant progress remains to be made. Russell Reynolds' annual examination of Fortune 250 boards shows that women and ethnic minorities are still quite underrepresented, especially in the leadership structure of boards. Women currently represent 20 percent of board members, while African-Americans represent 7 percent (versus 13 percent in the overall U.S. population, according to most recent census data). Hispanic Americans (who are now fully 17 percent of the U.S. population) are only 3 percent of Fortune 250 board members.

While each of these percentages has increased on a year over year basis, the same study raises the ques­tion of whether progress is truly healthy. The same members of underrepresented groups tend to serve on a number of boards. In the near future, we may see a halt in numerical progress as these in-demand leaders hit the maximum number of boards they can serve on without becoming overstretched.

We can see other factors both driving and limiting board diversity in the current environment. The rise of so-called "digital directors" has been a mixed blessing as far as diversity is concerned. Accord­ing to Russell Reynolds research, digital directors do tend to drive age diversity on boards to some extent, as their average age (51) is 11 years shy of the overall director average (62). Digital directors are also more likely to be female (31 percent versus 18 percent in the overall director population). As the digital director phenomenon matures and the distinction between "digital" and other directors increasingly blurs, it remains to be seen whether digital directors will continue to significantly alter board demographics.

Other issues, such as what diversity means beyond sheer numbers, have also limited progress toward board diversity. The perception sometimes exists that newly-added diverse board members will be seen as token or quota-driven representation, and will be excluded from key discussions by their fel­low board members. Boards struggle with the issue of "cosmetic" diversity-the classic instance being push back from stakeholders that adding a lone older white woman to a board is not a meaningful step toward diversity.

Looking across regions and industries, the question of "What is a diverse board?'' is be­ing answered very differently.

In the United States environment, while contin­ued pressure to add women and ethnically diverse directors exists, recent activity has centered on two underrepresented groups that are newer to the con­versation: LGBT people and Hispanic Americans. Tim Cook's ascension to the helm of Apple (and subsequent ground-breaking open statement on his sexuality) has energized the activist conversation around LGBT directors, particularly for consumer companies at risk of alienating this group as pur­chasers. Consumer-facing industries are similarly focused on dialing up Hispanic representation on boards, with an eye toward not only closing the demographic representation gap, but also toward gaining valuable insight into how to better approach this growing group as customers.

In Europe, in contrast, the conversation today focuses predominantly on gender. This is in some ways an artifact of the ethnic homogeneity of many European countries (especially those in Northern Europe), although as the long-run trend runs toward more heterogeneous populations, the emphasis may shift. While progress has been good in some countries, reports have begun to emerge that the same women are being named to board after board. Significant questions are arising about how this "supply crisis" will be addressed.

Another European issue that defies easy solutions is the question of national diversity. In an era where cultural stumbles are immediately broadcast across social media to mass audiences, European compa­nies are seeking out nationally diverse boards to ensure that the "tone from the top" is inclusive of their varied national audiences. Depending on the country, though, travel distances can be an issue, and language barriers remain a persistent limiting factor in assembling boards from an assortment of countries.

Discussions of board diversity in the Asian con­text focus on diversity of national representation. Progress on this front is mixed. Research finds that boards in Southeast Asia, India, and Hong Kong tend to have far more foreign nationals than their U.S. counterparts, but fewer than their European equiva­lents. Language is again a complicating factor here, and travel distances are far greater than in Europe. Adding another layer of complexity is companies' increasing desire (and activists' increasing clamor) to replace expatriates in key roles with individuals born in the countries in which they operate.

While trends by industry are not as distinct as dif­ferences by geography, a few themes have become apparent. Consumer industries are certainly under the most pressure to have boards that are similar to (and understand) their customer base. Regulatory pressure on individual financial services directors has increased to the point where tenures could actu­ally shorten. A more diverse pool of candidates may be needed to simply keep up with demand. Finally, one encouraging development has emerged in the healthcare industry. Emphasis on functional exper­tise on boards has increased the number of women directors from 14 percent to 19 percent.

Cutting-edge boards are employing four key strategies to become more diverse.

Historically, boards have grappled with diversity "one seat at a time." This is a ponderous process that tends to yield mixed results. Today, however, we now see leading boards approaching the issue holistically and strategically, using diversity as another lever for board transformation. Four strategies, in particular, are being employed to good effect:

Transform your skills-based selection ap­proach.
Skills-based approaches are deeply ingrained in board succession thinking. As boards attempt to grow more diverse, though, the addition of another set of criteria for candidate selection can seem daunt­ing and even counterproductive in a skills-based universe. Leading boards are taking a step back and questioning long-held assumptions about what can­didates from particular skills categories "look like." They are moving away from traditionally "badged" candidates, and completing the analysis to ensure they truly select for deeply-held skills.

Under such an approach, the first question to be addressed is the meaning behind a board's current skills mandates. Boards challenge themselves to go back to first principles and replace shorthand descrip­tors like "public company CFO" with what is being sought at the deepest level, such as "experience as lead financial communicator to large and nationally varied group of shareholders." A crisper skills man­date often allows boards to broaden their seniority criteria, and to look at diverse candidates found just outside of currently homogeneous selection pools (such as CEOs of smaller companies, divisional presidents, or even leading government figures).

This approach does more than increase the sheer number of diverse candidates who can be brought into the equation. It also broadens the pool of rel­evant candidates to help avoid the "traffic jam" issue of certain diverse candidates with a desirable skills being courted by more boards than they can reasonably serve.

Boards transforming their skills-based approach are also examining the skills picture needed over a longer time horizon. They are thinking about diverse candidates who might fit mandates in the near to medium-term future, and to begin cultivating a true pipeline.

This approach ensures that when a particular seat becomes open, the pressure to fill it does not lead to an artificially narrow search. Here as in many places a strategy to identify more diverse candidates also pays dividends in terms of better governance (specifically in terms of risk management), because it forces identification of future risks that might not otherwise occur.

Ultimately, boards seeking to transform their skills­ based approach should conduct a thought experiment: If the board were to be built from scratch today, what would it look like? What sorts of diverse candidates might fit this skills mandate? Having envisioned this state of the world, it becomes far more straightfor­ward to begin incorporating diverse candidates into succession processes.

Sharply define board culture and expected behaviors to encompass inclusive thinking.
The no­tion of inclusion is a relatively recent addition to the diversity conversation, but it is a crucial ingredient for success. A numerically diverse board without an inclusive mindset seems doomed to ineffectiveness.

Diverse directors brought into a setting that does not foster inclusion may experience isolation and dis­connection from the overall organizational strategy and purpose. Luckily, many of the board dynamics that lend themselves to a successful board-open-mindedness, mutual respect, and collaboration-also fuel an inclusive environment, so the issue should already be on many boards' radar.

Boards that make inclusion a priority consciously measure and manage inclusion dynamics. They moni­tor issues such as whether diverse directors report a different experience with board interactions than their peers, and leverage "board buddy" sponsor­ships constructed to foster greater inclusion. When they define desired director behaviors, inclusiveness is high on the list. They examine whether there are changes to formal board processes (meeting mechanics, agenda setting, etc.) that might drive inclusive interactions and thinking.

Think across borders, and make the logistics work.
For Europe and Asia, where even smaller companies are often challenged to operate seamlessly across borders, diversity of national representation can be crucial to board performance. The first step toward attaining this goal is to open up a dialogue with stakeholders to understand national representa­tion needs at the most meaningful level.

It is not enough to have representation from a large number of companies on a given board. In stakeholders' eyes, these directors need to represent the right countries. Moreover, engaging stakeholders in this way helps tease out the nuances of what is desired-are there particular subgroups, such as the speakers of a certain language whose needs are so specific and compelling that representation on the board becomes critical to business success?

Boards can take a few simple actions to address language and travel distance quandaries. Rotate board meeting locations to accommodate board members located in countries further from the central headquarters. Strategically using advanced videoconferencing can also ease the travel burden, and has the added benefit of reducing the board's environmental footprint. Translators are also a useful addition to meetings for those who might not be fully comfortable in the company's primary language.

Commit-measure-publicize-repeat.
In the U.S., the volume of activist voices exceeds the quan­tity of concrete regulatory action on board diversity. Accordingly, leading boards are taking matters into their own hands, and effectively publicize board di­versity targets and results in order to reinforce their own compliance.

The power of publicity to create change comes through powerfully in the data from Russell Rey­nolds' annual examination of the Fortune 250. This study found that Fortune 50 boards are more diverse than the balance of the Fortune 250. Because these larger companies face so much more public scrutiny on diversity, they have been effectively forced to show results. By creating this scrutiny themselves, forward-thinking companies who publically com­mit to aggressive targets created strong momentum toward delivering on their diversity promise.

Benchmarking is also vital to success in the com­mitment-measurement-publicity cycle. Companies will want to make sure that the diversity of their nominating and governance committee is front and center in this process due to this committee's unique role in shaping the diversity profile of the board. We find that joining organizations such as the "30 Percent Club" (30percentclub.org) drives progress toward a more diverse board by deepening connections with other organizations committed to this task.

Diversity can be challenging in the short term, but pays off in the long haul.

When we talk about diversity, our ultimate goal is diversity of mindset. Tomorrow's boards will be more innovative and manage risk better because their diverse array of members will bring to the table varied experiences and insights.

We are living in an exciting age when the "ideal" board member is being radically redefined. Compa­nies that do not embrace this change will miss out. There are real and concrete ways to construct a more diverse board, and for organizations that employ these methods, the payoffs will be tremendous.

Ultimately, smart thinking on diversity is often indistinguishable from smart thinking on board composition and management, period. The diversity conversation affords leading boards another chance to drive performance to the highest levels. Casting a wider net for more diverse candidates can only help us access the very best potential directors.

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Moving the Needle on Board Diversity