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Risks and Opportunities: The Board Diversity Imperative

The board diversity proposal put forward by Nasdaq at the end of 2020 has put the governance issue high on the agenda again for 2021, and rightly so. If approved by the SEC, all listed companies would be required to publicly disclose diversity statistics that are consistent, and transparent, regarding their boards of directors, as well as put the onus on companies that are noncompliant to explain why they are falling short. 

Change is coming, and it’s no longer optional. From BlackRock and Goldman Sachs to State Street, the message is clear, investors are demanding change and there will be de facto penalties for businesses who do not disclose data relating to the diversity of their boards. But creating a truly inclusive board is far from an easy task with many businesses questioning why it is so important. Is it worth the effort?

The financials speak for themselves. A 2018 McKinsey analysis found that diverse companies are 33 percent more likely to have greater financial returns. But the imperative to improve is so much more than the bottom line. Morally it is the right thing to do, and creating a diverse and inclusive business will have significant non-financial benefits in the longer term. But success will require everyone to pull in the right direction and boards have a critical role to play in making this happen.

In our latest thought leadership piece, we take a look at the difference between diversity and inclusion, the challenges boards face, and strategies to support board-level change.

What Is the Difference Between Diversity and Inclusion in the Workplace?

Diversity is the make-up of your employee population and relates to characteristics like age, gender, ethnicity, beliefs, or sexual orientation. Inclusion is the creation of a respectful work environment and business culture that embraces those differences and allows people to thrive and contribute to the success of the organization. In summary, diversity focuses on the “what” while inclusion focuses on the “how.”

Moving Forward — What Are the Challenges?

Diversifying boards doesn’t come easily or naturally for many companies. Creating an inclusive culture in a business that has ingrained beliefs and subconscious perceptions can feel like pushing a very large rock up a very large hill. For example, a lack of an egalitarian board culture and issues with unconscious bias are stumbling blocks that hold back necessary change and prevent initiatives from taking hold. Change is not something that can happen overnight, and for businesses playing catch-up, unnurtured talent pools will offer few solutions.

Whether public or private, established companies face different challenges when compared to smaller ones. For example, startups often default to boards that are investor-heavy, marrying specific expertise to advance company objectives at those stages. And because many investor groups continue to lack diversity themselves, this can impact the recruitment of boards at a time when diversity is essential for gaining market traction and driving growth.

Board Diversity — Opening the Door to Opportunity

While many less diverse businesses are financially successful, getting diversity and inclusion right can have major financial impacts. A 2019 McKinsey study found that companies in the top quartile for gender diversity on executive teams were 25 percent more likely to have above-average profitability. But it’s important to look at non-financial metrics to track company success and longevity beyond the share price and bottom line. Other benefits include:

  • Building a resilient business — Creating an inclusive and diverse board provides chances for success and true change for the better that will filter through the rest of the business. Leadership by example is a recipe for positive results.
  • Talent attraction and employee retention — Estée Lauder is a recent example of a business that faced a significant backlash from employees due to a lack of diversity. Leadership sets strategy, directs outreach, and decides recruitment budgets, instilling a dedication to organizational values that is a powerful recruitment tool. Without leadership buy in and prioritization, talented employees may feel disempowered and seek employment elsewhere.
  • Differentiating your business — Being a leader in these issues can separate a business from others slow to adopt appropriate inclusion. Setting the tone from the top can also help invalidate and neutralize accusations that an enterprise doesn’t “walk its talk.”

Diversity in Action — Strategies for Success

While there is still significant progress to be made, there are many signs of positive change. In 2019, women held 20.4 percent of board positions in the top 3,000 companies, up 3 percent from the year before. Companies of all shapes and sizes are showing their commitment to diversity and inclusion including:

  • Reddit, whose founder Alex Ohanian stepped down from the board in light of BLM protests, called for a black leader (Michael Seibel) to take his place.
  • Miami Marlins, who hired Kim Ng as GM, making her the first woman to hold that role for any major North American sports franchise.
  • Juul Labs, who added their first black and female board members in 2020.
  • The Diligent Director Network, created as the largest and most diverse community of board-ready executives globally created to widen the pool of diverse candidates for a vacant board seat.

For businesses working on diversity and inclusion initiatives, there are a number of strategies that can be used to improve the pace of change including:

Make it a leadership priority

Whether it is the CEO, lead director, or chair, having senior leaders identify and put their weight behind the issue will drive real change and provide the required focus to this significant project.

Improve recruitment methods

Many boards have a tried-and-true methodology for recruiting new board members. Whether that’s using the same executive search firm or getting recommendations from existing members, this can severely limit the pool of candidates. Looking across industries, changing advisors, and considering new-to-board members can break up traditional patterns.

Look at the bigger picture

For many boards it can be easy to focus on just one element, for example gender or race. Moving beyond tokenism and considering factors such as cognitive diversity or demographic diversity can truly have an impact on an organization’s success and enhance performance. In the longer term, developing a unique board that doesn’t just fit in will help a business thrive.

Communicate, communicate, communicate

Wherever you might be on the journey to inclusion, it is critical to encourage open communication at the board level, even if it shakes up the status quo. You can’t assume that everyone is on the same page about diversity and inclusion, and there may be some potentially difficult or awkward conversations. But if boards can work together to overcome their own biases and prejudices, organizations will truly have the foundations to a better, inclusive business.

If you want to continue the conversation or share your thoughts, our team is here to talk. Get in touch today. We would love to hear from you.