In 2021, companies are starting to wake up to the fact that their diversity efforts must extend all the way to the boardroom. That is, if they want to be both equitable and reap the advantages of having a diverse board.
Organizations are more focused than ever on diversity in their board makeup. The Harvard Business Review says that in 2019, 59% of directors added to the boards of S&P 500 organizations were members of either female or male minority groups. However, there’s still room for significant improvement.
In 2019, despite more diversity among newly appointed directors, 37% of S&P firms still didn’t have any Black representation on their boards. Black directors still only comprised 4.1% of the Russell 3000 companies this same year.
The Annie E. Casey Foundation states that at least 60% of all national nonprofit organizations serve BIPOC (Black, Indigenous, and People of Color). However, 84% of board members identify as white. 20% of these companies report that their boards have no BIPOC members whatsoever.
We’ll cover the following three points in this article:
- Why you ignore board diversity at your peril
- The stunning benefits of board diversity
- 7 ways to increase board diversity
The high costs of neglecting board diversity
These days, organizational values are more important than ever to consumers. How a company chooses a board of directors is an integral part of this.
According to an Edelman study on brand trust, 64% of respondents expect a brand to do what it takes to ensure racial diversity. The price a company pays for lack of commitment to diversity is diminished customer value because customers won't invest in companies that don't invest in their values.
The benefits of board diversity
A 2019 McKinsey study found that diversity in executive leadership correlates to increased profitability. The results showed that “companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile.”
Sometimes, boardroom decision-making is hijacked by "groupthink." This is an insidious problem defined as conflict-minimizing behavior that tries to reach a consensus without evaluating any alternative ideas. The more contributions come from people with diverse backgrounds, skills, and experiences, the less groupthink taints the quality of boardroom decisions, and the better these decisions are.
These days, organizations are competing on a global stage. To attain corporate objectives, directors need to understand the needs of their diverse customer base. A heterogeneous board achieves this by better representing consumers.
Board diversity can improve investor relations too. Institutional investors are looking for greater diversity in board membership because of the demonstrated correlation between company value and board diversity. Also, because investors are placing a greater emphasis on corporate social responsibility, diversity in your board makeup can help keep them happy.
Diversity requirement laws
One solution to the lack of diversity in the nation’s boardrooms is legislation. More than a dozen states are considering laws that address the lack of boardroom diversity. Some states are mandating strict quotas, while others encourage diversity through disclosure requirements.
Here are some laws enacted by states and other entities to boost board of directors’ diversity:
In September of 2020, California signed a law mandating diversity on corporate boards. According to USA Today, this law “[requires] publicly traded corporations headquartered in California to appoint directors from underrepresented communities to their board.”
This law, known as AB979, is an extension of SB826 enacted in 2018. This earlier law increased the number of female directors.
AB979 defines an underrepresented community board seat as “a director who self-identifies as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual or transgender.”
Organizations that don’t adhere to the regulation could face stiff fines. The requirements include:
- at least one seat on a company's board has to be from an underrepresented community by 2021
- boards with four to nine people must have at least two individuals from underrepresented communities by 2022
- boards of nine or more must have at least three persons from underrepresented groups by 2022
Nasdaq is imposing new regulations to improve diversity among its trading companies. In December of 2020, it filed a proposal with the SEC that “requires each Nasdaq-listed company to disclose specific diversity statistics regarding the composition of its board of directors.
The exchange went on to say, “Nasdaq further believes that a listing rule designed to encourage listed companies to increase diverse representations on their boards will result in improved corporate governance, thus strengthening the integrity of the market, enhancing capital formation, efficiency, and competition, and building investor confidence.”
7 ways to increase board diversity
Here are seven ways to beef up board diversity:
Look beyond your existing networks
To increase diversity, look beyond your existing networks. That way, you can create new board opportunities for underrepresented groups which will help them and help your company.
Susan Richards, the co-chair of the board of directors for Invest Ottawa in Canada, says, “In our experience, you have to reach out beyond your network. The issue with networks today is that they are so male-dominated. Women are not part of those referral cycles.”
Consider younger people
One problem with many boards is they’re composed of older people. That’s because many companies recruit board members who are experienced and already had a significant number of roles in their careers.
However, there’s a lot to be said for recruiting younger people to sit on a corporate board. Their skill sets can be valuable in grappling with changing business landscapes and demographics.
Partner with professional networks
Consider recruiting board members from organizations that make diversity initiatives an integral part of their mission. Organizations like the Black Young Professional Network partner with companies like Adobe, Airbnb, Facebook, and Google to add much-needed diversity to their boards.
Other professional networks that can help you find diverse board members include:
- Ellevate Network
- Black and Brown Founders
- Hispanic Women in Leadership
- LGBT Meeting Professionals Association
Create a board of directors' diversity program
To better organize your efforts, create an official board of directors' diversity program for your organization. This would include updating diversity policies, launching initiatives, and aggressively recruiting for board seats.
To accelerate your efforts, join the Board Diversity Action Alliance. Their mission is “taking action to increase the representation of racially and ethnically diverse directors on corporate boards of directors, beginning with Black directors.”
Setting board diversity goals
Some companies set board diversity goals. That means you probably should too. These can include things like:
- Adding one LGBTQ member to a board of directors in the next year
- Increasing board Black representation to 6% or more
- Only take organizations public that have at least one diverse board member
Remove bias from screening
Removing bias from the screening process for new board members is another way to increase board of directors' diversity. One way to do this is by using a text analyzer to remove exclusionary language from board member job postings.
This includes bias based on age, sexual orientation, disability, and gender. Removing this kind of linguistic bias makes it possible for you to find more diverse candidates.Hire a board of directors' diversity search firm
Some executive search firms have a particularly good track record of improving board diversity. Here are a few:
- TREWSTAR: 60% of the candidates the firm placed in 2020 were men and women of color.
- DIVERSITY RECRUITERS: This company helps organizations advance ethnic, racial, and gender diversity on nonprofit and corporate boards.
- WITTKEIFFER: This company has been around for over 50 years and is on the Forbes list of top recruiting firms in the country. Lately, they’ve been stepping up their efforts to help companies increase board diversity.
Examples of diverse boards of directors
Here’s a recent breakdown of a few companies’ boards of directors:
- FACEBOOK: 40% women, and two are Black women
- AMAZON: Five women and five men with two people of color
- TARGET: 1/3 are women, and almost half are Latinx or Black
- STARBUCKS: 46% are people of color, and 39% are female
- SURVEYMONKEY: Five women and five men, including 20% racially diverse members with two women of color
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