Diversity in the boardroom is not a new topic of discussion. It has recently been mentioned more openly within public companies due to certain mandates to ensure a diverse board composition. The question most often asked is does a diverse board bring more efficacy and strategic thinking than a traditional board comprised of similar individuals?
What is Boardroom Diversity?
Diversity in the boardroom is imperative to the success of a company. Diversity can take place in many different forms in a boardroom like having a good mix of skills, expertise, experience, gender, and ethnicity to name a few. Public and private companies should want an evident and optimal combination of all of the above to ensure the board as a whole is able to lead the organization and guide the strategy effectively.
Within US public companies, C-suite experience was discovered to be one of the most highly sought after boardroom skills. Many board members deem C-suite experience immeasurable, while often forgetting others who may fit the description of “board ready” without the history of C-suite skills. These extremely talented individuals could bring a much-needed diversity of thought and insight to the boardroom.
Benefits of Boardroom Diversity
There is no denying the plausible benefits of having a diverse boardroom. In 2021, BoardReady, a non-profit organization, released a comprehensive report on board diversity and the performance of numerous S&P 500 companies. This report proved the following:
– Companies with 30% of board seats occupied by women delivered better year-over-year in 11 of the top 15 S&P 500 sectors than less gender-diverse boards
– Multi-generational boards performed better in 2020 than the less diverse boards
Unfortunately, the BoardReady report could not account for the benefits of having racial diversity in the boardroom due to the lack of racial diversity on S&P 500 boards. This absence made it difficult to do an accurate statistical analysis of racial diversity on performance. Less than a third of companies in the S&P 500 have boards in which non-white board members occupy at least 20% of their seats.
However, of the companies that did have 30% or more board seats filled by non-white directors, there was a 1% increase in year-over-year growth versus a 5.6% year-over-year decline in companies with less than 20% of the board occupied by non-white directors.
Additionally having a diverse boardroom has demonstrated:
– companies with diverse executive boards also enjoy significantly higher earnings and returns on equity than those favoring a single demographic
– diverse boards are better positioned to understand the customer base and the business environment in which it operates
Diversity Retention in the Boardroom
Having a diverse representation in the boardroom is only half the battle, keeping the boardroom diverse is the other half. It takes leading and leaning into boardroom health to sustain a culture where a diverse candidate would feel welcomed. While the board may be diverse, implementing and fostering an environment of inclusion is necessary.
Normally, board members are elected one at a time, so for a period, there may be only one person who is not the same as the others. While having a seat at the table has been accomplished, board members still need to feel valued and know their voices will be heard. This will allow the individual to have the psychological safety needed to be productive and give their all to the organization.
Having an inclusive board is important and can be achieved by providing training, education, experiences, and connections to the board members to understand the why behind the necessity of an inclusive environment.
Diverse Boardrooms in Public vs. Private Companies
The pressure is on for companies, both public and private, to make their boardrooms more diverse, especially after the release of the number of fortune 500 companies who lacked any diversity on their boards. Only 28% of board seats in the S&P 500 were filled by a woman in 2020. Even now, while each S&P 500 company finally has a female on their boards, there are still 187 companies lacking a single Black person in the boardroom.
On the other hand, private companies have been flying under the radar for quite some time as they do not fall under the same disclosure requirements as public companies. Private companies also do not release their board composition as readily as public companies. Hence, studies have shown that of the 359 most significantly venture-backed companies, 49% did not have a woman on their board and only a whopping 18% had a male minority on their board. A female minority on the board was even more dismal at 3%.
Changing the Face of the Board
Changing the face of the board is paramount to any company to ensure innovation, improved relations with consumers, growth, and better productivity and performance. In order to change the boardroom, certain practices have to come into play like:
– recruiting more demographically diverse director candidates with strong business backgrounds
– identifying diverse director candidates who have experience in areas the board needs to meet the company’s current and future goals and requirements
– recruiting from new and different talent pools outside of the board member networks and historical practices to remove the barricade for diverse director candidates
– including more directors in the interview process and hold the interviews in different settings to better evaluate the candidate
All in all, building diverse boardrooms in public and private companies will not happen overnight. There must be a culture that values diverse experiences, beliefs, and perspectives. There has to be the will and the want to incorporate diversity, equity, and inclusion across the organization, to include at the highest level.
“You can have all the diversity in the world, but it won’t matter if you don’t have the right culture.”
Have you ever sat on a diverse board? What were the lessons learned?
Have you ever been a candidate for a board? What was your experience?
Do you think over time private companies will start to diversify their boards more like public companies?
Visit us at diversityzoom.com to see how we plan to diversify the boardroom!