Board Room Diversity: Varied Minds, Better Decisions
Board composition is receiving particular interest as recent studies indicate strong correlation between board diversity and company earnings. Diverse boards exhibit a broader range of perspectives, which can broaden a company's awareness of risk and revenue opportunities. In many industries, a diverse board is paramount to representing multiple stakeholder perspectives. Company shareholders, customers and employees are all more diverse than the average corporate board. Board seats at companies in the S&P 500 in 2016, for instance, were occupied by roughly 21% women, 79% men. As of the 2010 census, population distribution in the United States was closer to 50/50. When crises strike (as they inevitably do), diverse boards tend to meet them with greater flexibility and ingenuity. What these boards demonstrate, more than anything else, is diversity of thought.
So why is "diversity of thought" important? The board's purpose is to insure corporate governance. This is all the more critical in the U.S. where the CEO is often also the board Chairman. In Europe, by contrast, the Chair is an independent role, which can improve board oversight. On both sides of the pond, corporations benefit from varied experiences and perspectives of a dynamic board that is willing to assert its independence and judgment when necessary. If the board simply exists to rubber-stamp the CEO's decisions, then it abdicates its crucial responsibility.
In the best cases, a board that demonstrates diversity of thought will collaborate to achieve shared, collective goals. The point isn't to generate competing priorities, but to approach problems from different angles, based on the board's wide variety of experiences. A company that wishes to achieve true diversity of thought will ensure that its board is diverse in several respects:
Visible Diversity is important for both diversity of thought and superior stakeholder representation. This is the metric for diversity that gets the most attention. In many ways, it is also the factor that can easily trip up nominating committees. This is far from a 'check the box' exercise. The pool of these diverse candidates is deep with impressive experience and skill sets. When a board includes strong members that also are gender or racially diverse, it is better representative and inclusive of key stakeholders and the broader community. It is likely to raise concerns and insights that more homogeneous boards might not consider, and spot risks and opportunities proactively that otherwise might go undetected. Visible Diversity is far from the only way to attain diversity of thought, but it is ever more important in today's complicated and competitive environment.
Age Diversity helps corporations prepare for the future. According to a recent study, the average age of directors on corporate boards in the S&P 500 hovers around 62 years. An average can leave a lot of wiggle room, though. More telling, "the median standard deviation of ages at the S&P 500 company boards is 6.9 years." These statistics indicate a tremendous opportunity for corporate boards that hope to achieve diversity of thought. A wider disparity in ages can bring fresh ideas into the board room. Directors who grew up in different decades will address challenges differently and younger candidates may identify risks and prospects that a homogenous group of older directors would otherwise miss. Younger directors also are capable of serving longer terms, adding consistency to long-term planning, and provide a more predictable succession for the future. In addition, given the relative lack of age diversity on many corporate boards, a talented pool of younger potential director candidates is essentially an untapped resource. Most boards have not yet recognized the assets that younger directors can provide, and are therefore not competing for some truly excellent candidates.
Board directors should come from various leadership positions. Many companies stack their boards with ex-CEOs, assuming that current and former leaders will guide the strategic direction most effectively. This strategy, however, misses out on the wide range of competencies that people develop in additional C-suite roles. Directors who were once (or currently are) CFOs, CTOs, CMO's, CISOs, CCOs or a variety of other 'Cs' will add depth to board-level discussions through the collectively wider range of skills on offer. The search doesn't necessarily need to be limited to the C-suite either. Many entrepreneurs are qualified to be directors and can provide a fresh angle in this era of disruption.
While some of these categories are not exhaustive, they highlight how diversity of thought arises from multiple individual factors of contrast within a board. Understanding how to effectively diversify a board can seem difficult, but it doesn't need to be. I started BoardReady, a non-profit that is dedicated to helping corporate clients and investors increase boardroom diversity. From thinking through realistic diversity targets using the BoardReady Index to benchmark against a peer set, to a customized BoardFit Analysis that works with the board to build a diversification strategy delivered by seasoned, experienced board directors, BoardReady amplifies options to diversify.
If nominating committees broaden their scope and include diversity as a factor of succession planning, the result would be better boards, making better decisions, that better reflect stakeholders and ultimately creating more successful and sustainable companies. Nominating committees and the boards they represent would be well served to take a holistic approach, illuminating a range of perspectives that would help the board govern more effectively. True diversity of thought goes far beyond 'checking the box'. It incorporates a wide array of approaches to achieve a common goal, leading to stronger results and more resilient strategies for the future.
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