Having a diverse board of directors is becoming more important to businesses, especially large public companies, as diversity, equity, and inclusion (DEI) initiatives are moving up on the corporate agenda.
“Across every industry we need diversity of perspectives as well as a diversity of people,” said Danielle Sanghera, ACMA, CGMA, a manager at Deloitte in London. “There needs to be the support networks and programmes in place to help guide women and underrepresented groups until this is no longer something that is talked about.”
Progress has been slow in the past.
Less than a quarter (23.3%) of board seats globally were held by women in 2020, up from 20.4% a year earlier, and one in ten large multinationals had no women directors, according to a study by Egon Zehnder, a global management consulting and executive recruitment firm.
Small boards average nine seats and large boards usually exceed 13 seats, according to a 2014 study by The Wall Street Journal and GMI Ratings. To experience the full benefit of board diversity, it takes at least three directors on the board who are women, ethnic minorities, or identify as LGBTQ+, according to the Egon Zehnder study.
The largest companies in only 18 countries averaged three or more women on their boards in 2020. Eight of those countries had quotas or regulations in place requiring the hiring of women. Diversity beyond gender is lagging even more, the Egon Zehnder study suggested. In 2020, more than half (59%) of the top 350 companies listed on the London Stock Exchange had no non-white director. Boards of the 500 largest, public companies in the US seated more than 5,000 directors, but only 24 of them were openly identifying as LGBTQ+.
Achieving corporate boardroom diversity is challenging for a number of reasons, said Mary-Hunter McDonnell, associate professor of management at the University of Pennsylvania’s Wharton School. Most importantly, boards are slow to shift away from the idea that only people who have C-suite experience can be considered for service, McDonnell said.
“Another challenge is that traditionally male-dominated industries such as manufacturing in traditional societies require a conscious effort to make this change happen,” said Tetsuya Morikawa, CPA/ABV/CFF, CGMA, senior vice president and CFO for Bushu Pharmaceuticals in Saitama, Japan.
Tactics to accelerate board diversity
Board refreshment plans can help with some of these challenges, but mandatory retirement, assessments, and tenure limits have not been effective enough to bring in new, diverse board members, according to research by executive recruiters The Ellig Group and the Society for Human Resource Management (SHRM), a membership organisation that supports human resource professionals.
To move past the challenges and towards greater boardroom diversity, the 20 directors and executives who participated in the Ellig/SHRM research suggested the following actions:
Diversify the nominating and governance committee. This committee recommends candidates who would be a good fit to become members of the board when a seat comes open or is added. Having existing board members from underrepresented groups serve on the committee is likely to increase the odds that new members joining the board will be diverse.
Increase transparency. Once a board agrees on the right mix of diversity on the board — how many seats should be held by women, ethnic or racial minorities, or individuals identifying as LGBTQ — the goals should be made public. That means setting specific diversity goals and committing to make them, so stakeholders can hold the board accountable.
“Public conversation about underrepresented groups can be effective in highlighting that a lack of diversity is a problem, which can mobilise powerful stakeholders to demand that companies take action,” McDonnell said. But the debate should be reframed, she said.
McDonnell studies organisational behaviour within challenging institutional contexts and is particularly interested in how a company’s interactions with its stakeholders shape corporate social activity and nonmarket strategy. Considering research on the performance benefits of board diversity is mixed, the question is not why we should increase board diversity, she said. “Rather, the question is why we should tolerate nondiverse boards when there is absolutely no evidence of any performance benefits to a lack of diversity.”
Demand diverse slates of candidates. That includes rejecting recommendations from the nominating and governance committee and executive search firms that fall short of diversity goals the board set or fail to satisfy requests the board made.
“As a practical matter, in order to get a diverse pool of candidates to consider, a board has to communicate to head-hunters that it wants to prioritise diversity and is willing to look outside of the C-suite to find it,” McDonnell said.
Refresh the board. Robust annual assessments of individual directors should determine whether board members are contributing, how effective they are, and whether their skills are relevant to enabling the business’s strategy. When board membership remains the same for years and years, it may be time to remove underperforming directors to encourage turnover.
Sponsor or develop diverse executive talent. To increase the number of diverse candidates ready to join boards, human resource departments need to recruit more executives from underrepresented groups. Also, businesses need to institute internal mentorship and sponsorship programmes in which existing board members participate.
McDonnell and Morikawa agreed.
“In order to become more diverse, boards have to look outside the C-suite for people who have the valuable experience and unique capabilities in other relevant domains,” McDonnell said.
“Hiring a diverse workforce and accepting leaders with diverse backgrounds for board positions will motivate employees to excel and this should cause a trickle-down effect for managerial assignments,” Morikawa said.
Add a seat. Especially if a board has low turnover, for example, when membership hasn’t changed in a decade, expanding the board by adding a seat can achieve greater diversity.
Exercise peer pressure. Any executive with board experience can refuse to join boards not committed to DEI principles and the affiliation could become a reputational risk.
Seek skills, not titles. Directors looking for board candidates can focus on functional or specialised skills and expertise rather than on executive titles, such as CEO, or previous board experience.
Broaden the recruitment network. Go beyond traditional recruitment channels and seek candidates to serve on the board from as many sources as possible.
“For every business, diversity begins in the talent pipeline,” Sanghera said. “There needs to be more diverse recruitment within experienced hires and senior grades that is then maintained within companies.” That may even mean introducing the role of chief diversity officer, which is something businesses in the US have done, she said.
— Sofia Simeonidou is a freelance writer based in the Netherlands. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.