Corporate Board Diversity: A Slow Train Moving (Part II of IV)
Corporate board diversity continues to increase slowly – and I mean slowly. For United States companies, corporate boards are far behind their foreign counterparts. California has imposed a minimal requirement that every public company must reserve at least one board seat for a female director. Norway, Spain, France and Iceland have legal requirements that women comprise at least 40 percent of boards at public companies.
Between 2017 and 2019, the number of women on Russell 3000 board rose from 15 to 19 percent. Most of the increase was from women serving on boards of mid- and large-cap companies rather than small- or mega-cap ones. While the scholarship on board diversity benefits has been mixed, there is no question that social justice and political pressure on corporate board diversity is significant and likely to increase. Companies that ignore these demands can suffer real and significant reputational and brand damage.
The news is not all negative as to current trends and changes – in 2019, 45 percent of new board members were female. In the absence of COVID-19 and the current economic disruption, this number hopefully will increase. With respect to ethnic and racial diversity, the number of new directors who are non-Caucasian is approximately 15 percent.
Board diversity is critical – social and professional diversity are both important. Gender, race/ethnicity and age diversity and professional diversity expand the range and perspective of ideas, responsibilities and creativity. From the current data, corporate boards are risking the perception that board seats are being filled with a focus on “tokenism.” In conducting searches for new board members, corporate boards have to avoid a singular focus on a candidate’s race or gender and include a broad focus on that factor along with other professional skills that would be positive for the board. In other words, diversity needs to defined to include various factors that may promote board diversity.
Boards should also consider expanding consideration of professional backgrounds, thereby increasing the strengths of a board to apply expertise in other subject areas. Many times board members fill vacancies by a limiting question – “Who do we know that may be interested?” Such a constrained view will only result in a narrow self-fulfilling mechanism to maintain the status quo.
Board members have to take a holistic view of membership – focus on ethnicity and gender along with professional skillsets would be a basic and effective steps to increase board diversity and ultimately board performance. Adding board members with expertise in compliance, information services, technology and other important economic trends would be an important strategic turn for the better.
Diversity also extends to encouraging different perspectives, voices and contrasting insights into corporate governance issues. Corporate boards may want to solicit input from non-traditional sources outside of the CEO including other senior managers, and even relevant managers. If a CEO clamps down or resists communications with other senior managers, the board’s ability to gain access to adequate information may be at risk.
A “collegial” board culture is likely to improve performance by promoting open discussion and consideration of ideas. Too many board meetings are dominated by a CEO and one or two board members. It is important to increase participation and discussion to make the board dynamic more effective.
Back-channel of concerns is often a symptom of a weak board that does not encourage ideas and consideration of alternatives. By contrast, a collegial board can bring together expertise from different perspectives, analysis of issues, and wider consideration of issues and ideas.