Why is board diversity important?

In this article, we discuss the importance of boardroom diversity for forward-thinking companies. We argue that the strong correlation evidenced between diversity and positive board performance should not be confused with causal nexus. Instead, board diversity is the natural outcome of a great search process and a well-run organisation. Diversity should not be a target for its own sake. As part of our review we look at the latest board diversity statistics, how private equity boards remain behind their listed company counterparts and the opportunity for funds to get ahead of the curve, how we think about board diversity, what a board diversity policy should look like, how diversity can be promoted at the highest level and what you can do to increase the diversity of your board.

Why is board diversity important?

The case for boardroom diversity has never been stronger. In Deloitte’s 2017 Board Diversity Survey, ninety-five percent of respondents agreed that their boards need to seek more candidates with diverse skills and perspectives.

This broad acceptance of the need for diversity has been fuelled by strong evidence for the business logic of diversity by study after study, showing a strong correlation globally between business performance and workforce diversity.

The need for greater board diversity has also been fuelled by the necessity to address growing schisms in polarised societies across the world: as Sir John Parker observed In his recent report on the Ethnic Diversity of UK boards, boards need to continue to earn their “licence to operate in society”.

Listed company shareholders are publicly demanding greater diversity

Public company shareholders have led the charge in championing the advantages of diversity and reasons why diversity is important. State Street Global Advisors, which manages about $2.5 trillion, famously commissioned the “Fearless Girl” statue facing down the raging Wall Street Bull to advocate for more women in leadership and women in the boardroom. Having identified 476 firms in the United States, United Kingdom, and Australia that did not meet its diversified background standard, it voted against management-recommended directors at 400 of them.

They have been publicly joined by Blackrock and other leading investors who have gone on an offensive to drive home the message that “Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions.” In the UK Hermes EOS (who currently manage £260 billion) now maintain a policy to vote against all boards in the FTSE 100 with less than 25% women in the boardroom and no real plan in place to rectify this. As the 2017 Hampton Alexander review highlights, while there is still a long way to go, there has been real progress for gender diversity on boards.

Private equity makes the right noises about diversity but is yet to demonstrate progress

In the US, the American Investment Council runs the Private Equity Women’s Initiative which has developed clear guidelines for its members around recruiting, retention, policy and infrastructure. In the UK the British Venture Capital Association (BVCA) currently has a female chair, Helen Steers (the second in its history), while three out of 11 (27%) of its Council members are women, making it a paradigm of gender diversity in the boardroom. They have a section of their site dedicated to diversity and its importance. They have also championed or sponsored diversity initiatives like Diversity VC and Level 20. 

While this all sounds good, it remains unclear how high diversity is on the agenda for the majority of private equity investors: with women comprising just 18% of the private equity workforce globally and “only 5% of leadership roles held by women in European private equity”, the facts speak for themselves. Until investors in these private equity funds (and it will likely need to be the institutional investors because High Net Worths are too fragmented to catalyse the change) start taking action against those funds who fail to demonstrate a commitment to having a diverse board of directors in every investment, as they have done with listed companies, it’s unlikely to change any time soon because the culture is so ingrained. We would not be surprised to see this happen in the not too distant future given the current political climate, and those private equity funds who get ahead of the curve will reap the rewards of more investment and higher performance.

The latest gender board diversity statistics show there is still much work to be done

• The global average of women directors on corporate boards has risen from 12 per cent to 15 per cent since 2015.
• Norway is leading the way in board gender diversity with 42 per cent of women on corporate boards. With detailed quotas introduced as far back as 2003, Norway has proved that gender diversity at board level is achievable when taken seriously.
• The United Arab Emirates has only 2 percent of women on board of directors.
• France has achieved 33 per cent due, in part, to a quota that came into effect in early 2017.
• Sweden has 32 per cent of board positions filled by women without having any legislative quotas/requirements in place.
• New Zealand has achieved the quickest growth, rising from 17.5 to 27.5 per cent in just two years.
• A report by Deloitte found that in organisations that have female leadership, board gender diversity is double that of companies led by men. In companies with a female CEO, around 29 per cent of board positions are held by women, compared to only 15 per cent in companies with a male leadership.

While these female directors statistics illustrate that there is still a long way to go towards achieving full board diversity, they also show much progress has been made. If the right measures are in place, a progressive corporate culture can take effect and bring real change to organisations and businesses.

Source: Deloitte’s 5th edition of Women in the boardroom

Ethnic board diversity statistics show a similar picture

While the case for gender diversity has been championed for some time and the number of women on boards has grown substantially, the case for broader ethnic diversity started much later. In the US the 2014 Corporate Diversity Survey is the fourth in a series focusing on Fortune 500 companies, while in the UK the 2017 Parker Review, which focuses on the FTSE 100, was the first report of its kind. As a result, the available data is much less rich but paints a similar picture.

In FTSE 100 companies (regardless of nationality), at the end of the first quarter of 2016:

• There were only 90 individual directors who are people of colour (comprising approximately 8% of the total available positions)
• 40% of those directors were drawn from seven individual companies, five of which have been historically headquartered outside of the UK
• Fifty-three companies within the FTSE 100 had no directors of colour
• Only nine individuals who held the position of Chair or Chief Executive Officer are people of colour.

In Fortune 100 companies in 2014:

• 4 companies do not have a single racial or ethnic minority on their board.
• Latinos represent only 4.9% of directors; 35 companies do not have a single Latino director
• African Americans represent 10.0% of directors; 9 companies do not have a single Black director
• Asians represent 3.3% of directors; 47 companies do not have a single Asian director
• Native Americans continue to represent 0.0% of directors

What is the definition of board diversity?

Thus far we have considered board diversity in terms only of gender diversity and ethnic diversity, but it should be considered against a much broader context.

Companies are increasingly seeking full diversification of their boards, across gender, age, colour, disabilities, and sexual orientation—as well as industry experience and disciplinary expertise (e.g., cyber, digitisation, marketing, and human resources), even though these may be individuals who don’t necessarily have traditional CEO or board experience.

It is about building a board of directors that accurately reflects the make-up of the population of the country or countries where the company operates, or those people in contact with or affected by the organisation.

The aim of board diversity is to cultivate a broad range of attributes and perspectives that reflects real-world demographics.

Homogenous boards can breed ignorance, groupthink and lead to bad decision making at the highest level. This is why diversity matters, and why all future-facing companies require a diversity policy at board level.

“Google’s Ideological Echo Chamber” - an alternative perspective

While it is easy to jump on the diversity bandwagon, any thoughtful board needs to be constantly challenging the assumption that diversity is a good thing as it should with any of its core beliefs.

When Google CEO Sundar Pichai publically emphasised why diversity is good in the boardroom, stating that “a diverse mix of voices leads to better discussions, decisions, and outcomes for everyone”, it soon became clear that not all his employees felt the same.

In a controversial memo written by Google software engineer James Damore, he argues that we need to “demoralize diversity”. Damore clearly states that he is not saying “diversity is bad, that Google or society is 100% fair, that we shouldn’t try to correct for existing biases, or that minorities have the same experiences as those in the majority”, but argues we should be clear about biological differences between men and women as the reason why "we don't have 50% representation of women in tech and leadership." He criticises Google for offering mentoring and other programs for women and minorities, and for what he calls "special treatment" of job candidates who are women or underrepresented minorities. He also challenges the efficacy of unconscious bias programs where he sees the potential for over correction and backlash.

While it’s beyond the scope of this article to comment on Damore’s position, the example highlights what a political minefield it is to navigate successfully.

What are the benefits and advantages of a diverse board of directors?

While the McKinsey and Harvard reports referenced at the start of this piece have quantified the correlation between business performance and board diversity, it is hard to evidence a direct causal nexus.

At Nurole we see diversity as the natural outcome of finding the best talent, not a goal in its own right. However, it is possible to outline the benefits and advantages of a diverse board of directors as demonstrated by the excellent Parker Review which provides an intelligent and succinct summary of the potential benefits of diversity in the board, drawing a useful distinction between internal and external benefits:

Internal benefits

Inclusive Leadership & Avoiding “Groupthink”

• A Board capable of drawing on a range of thought, experience & expertise
• A Board that can engage with an increasingly diverse range of stakeholders

Corporate Culture

• A Board that reflects a company’s commitment to diversity
• A Board that reflects the breadth of a company’s ambitions, including those of its employees, customers & communities

External benefits

Brand Value

• A Board capable of enhancing & protecting the corporate brands by acting consistently with articulated corporate culture & values
• A Board that reflects the fact that sales of FTSE companies are made increasingly outside the UK & consumers want to align themselves with brands that reflect their priorities

Recruitment

• A Board committed to identifying, attracting, retaining & promoting the best talent, irrespective of the gender, ethnic background, religion or other defining characteristic of any candidate
• A Board that can develop the global talent pool into corporate leaders capable of delivering on the long-term strategy of the company

Supply Chain

• A Board that is capable of appreciating & managing risks associated with global resourcing, which invariably requires an understanding of cultural sensitivities, norms & vulnerabilities

Significantly, the Parker Review intelligently recognises the right of stakeholders to view the need for Board diversity from different perspectives and that it does not matter whether the benefits of diversity are “understood through the lens of changing demographics, the recognition by key stakeholders (including governments, shareholders, employees and consumers) that companies should reflect valuable societal and cultural norms, or because successful corporate leadership needs to benefit from diversity of thought and improve decision-making. Each and all of these elements may be reason enough to change on their own; however, when taken together, the case for change becomes more clear and compelling.”

We saw an interesting recent example on Nurole of a FTSE 250 board who sourced a 32-year old candidate through the platform who would never normally have been on their radar. While the individual qualified in their own right to sit on a board irrespective of age, it struck the board they also offered a millennial perspective which nobody else had but was likely to be a major source of focus for the business in the foreseeable future across all stakeholders.

In what ways can you promote board diversity?

There are several effective actions we see the best boards taking to promote board diversity:

• Publicly state your commitment / diversity goals: put simply, clearly explain what is meant by diversity for your organisation and how you will measure it. A board diversity policy is a sensible starting point.
• Collect data: “what gets measured happens” - this follows naturally if you are clear about your goals for board diversity and firm performance.
• Unconscious bias training aimed at improving hiring programs: unconscious bias is a particularly hot topic at the moment and is often identified as one of the largest factors working against progress in board diversity. Unconscious biases are deep rooted prejudices that we have that we are not aware of having, yet they surface in our split second and reflex decision making. In this way, unconscious biases can have a large effect on a business’s culture, recruitment processes, and many other aspects of a workplace environment. Awareness training on these issues - something many businesses are now doing - is an effective way to bring these unconscious biases to the surface so that they can be addressed and overcome.
• Inclusion policies and practices: while policies are often at risk of gathering dust, the act of creating them and periodically reviewing them, especially if done collaboratively, can help engender and reinforce the right mindsets across the organisation.
• Open network recruitment process: make your recruiters work harder for you. Improving diversity will not happen if the search process is not done properly. Many search processes have barely changed in almost a century despite the wave of digital innovations happening elsewhere. What we have seen through Nurole’s platform is that when you use an open network to source talent, diversity is a natural outcome of finding the best talent.
• Board apprenticeships: the best boards we see on Nurole will hire for their board pipeline, well ahead of time. Formal initiatives have been put in place by organisations like the excellent initiative started by Board Apprentice.
• Executive pipeline: the board pipeline is ultimately a function of the executive pipeline - if there is not enough diversity in the executive pipeline, the board pipeline will always be limited.
• Mentoring: while aspiring directors must invest in their own board-readiness and candidates have to put themselves out there to create a network and build visibility, investing the board resource to provide prospective candidates from under-represented parts of your organisation is a highly effective way both to encourage their development and assess their suitability.
• Affirmative action: organisations like Slack have introduced the Rooney Rule into their hiring process. This requires them to interview minority candidates for roles though there is no quota or preference given to minorities in the hiring of candidates.

Common pitfalls for boards seeking to improve board diversity

• Default to the reflex response “there just are not enough good women or minority candidates available” - having seen numerous organisations who have been told by search firms running traditional search processes there are no female or minority candidates that tick the boxes you require only to find exactly that candidate on the Nurole platform, we know it’s simply a case of needing to cast the net wider.
• Closed network recruiting: Boards can quickly back themselves into a corner by approaching the same handful of board-experienced candidates who may not have the capacity to take on other directorships.
• Corporate understanding of, and rhetoric relating to leadership traits and qualities are inherently masculine and are similarly difficult to shake: why is it that qualities which are highly sought after in men, such as being “assertive,” “confident” or “decisive”, tend to be interpreted so differently when applied to women? These expectations and unconscious bias have contributed to an environment where many women constantly self-check their behavior. They strive to achieve their best and equal their counterparts, but need to do so without being labelled “bossy” or “domineering”. And all this whilst often taking on the greater portion of domestic tasks at home, which may or may not include raising children. As a result, women are more prone to avoid risk in critical career moments.
• “Must have previous CEO/Chair experience”: boards need to unpack this into specifics. What is it they are seeking? A disruptive mindset? M&A experience? Commercial acumen? By taking this approach, they will find their talent pool increases significantly. Ultimately, while previous CEO experience may be highly regarded, it is not necessarily an essential requirement to taking a seat at a board table.
• The complexity of quantifying diversity: Google’s public travails have offered a sobering reminder of how difficult it is to evidence progress on the diversity front and how subjective any evidence offered will be to interpretation.

What does a board diversity policy look like?

If you have never seen a board diversity policy, it’s instructive to review several examples because they range quite widely.

At one end of the spectrum, Google’s diversity policy and Slack’s diversity statement which are content rich, feature packed and supported by data. At the other end, we can look at Bupa’s diversity policy and Alliance Trust Saving’s 2017 diversity policy which are short one page, matter of fact, plain text statements.

To a casual observer the tech company statements might look more authentic but they are no more ambitious or indeed successful, as some of both Google and Slack’s recent challenges have highlighted.

At a minimum, a board diversity policy will:

• Detail the scope of its application in the organisation
• Acknowledge those ultimately responsible for it
• Be driven by both economic and ethical factors
• Look beyond gender and ethnic diversity
• Be specific to your organisation
• Include detailed targets as well as frequency and method of measurement and review procedures
• Be consistent

Conclusion

Diversity initiatives, policies, and campaigns are becoming an integral part of the executive search process. High profile candidates from all backgrounds do exist, often in places organisations have never thought to look.

The key to finding those of the highest calibre to create a diverse board of excellent leaders is in the search process. Boards must ensure the maximum field of vision is applied to identify and attract the most qualified and passionate leadership contenders from around the world. Boards must cast the net wider.

Board of directors diversity should never be about meeting quotas. Board diversity is about advancing businesses to new heights by bringing together diverse experience that together enables a company to navigate a dynamic marketplace with leaders in place that fully understand, and represent, the stakeholders they serve. Businesses who fail to grasp this, are unlikely to survive long.