Thoughts on Board Diversity
Board diversity has been in the news for quite some time, but more recently, California became the first state to mandate that publicly traded companies headquartered in the state name women to their boards. Countries outside the U.S. have enacted similar laws.
The new law stipulates that companies with at least five directors will need to have at least one female member by the end of this year, and two or three female members, depending on the size of the board, by 2021. According to the Wall Street Journal, the mandate in California could accelerate boardroom diversification across the country.
But does diversity really matter?
As noted in Forbes by professor Katherine W. Phillips from the Kellogg School of Management, diversity can result in better decisions. She explained that diversity “often comes with more cognitive processing and more exchange of information and more perceptions of conflict,” which she believes can spur new idea generation and creative solutions.
Lisa Wardell, president and chief executive officer of Adtalem Global Education, wrote in Corporate Board Member that “board composition sends a powerful signal to current and future workforces about an organization’s commitment to equality of opportunity. It also signifies a commitment to performance, since studies show clearly the benefits of a diverse workplace. McKinsey & Company found companies with strong gender diversity among their executives were 21 percent more likely to outperform on profitability compared with peers.”
Mike Myatt, chairman of N2Growth, recently offered a top-10 list in favor of diversity. You can read it here.
Last year, Elizabeth Warren, a current U.S. senator and 2020 presidential candidate, introduced a bill called the Accountable Capitalism Act, that, among other things, would require that workers at companies generating more than $1 billion in revenue directly elect 40 percent of a company’s board of directors. This seems, to me, a bit more controversial than the new California mandate. In fact, when conducting research for this blog, I couldn’t find much in support of her proposal. Interviewed on CNBC, professor Jeffrey Miron from Harvard University said that Warren’s proposal “will create a whole set of new rules that the federal government will enforce. Those rules will not be clean, explicit or simple. They’ll be messy, they’ll be complicated. [It will create a] huge ability for companies to evade and avoid.”
So, what are companies doing, if anything, to increase board diversity?
A survey conducted by the National Association of Corporate Directors late last year showed that more than half of directors who responded said that their organizations have board diversity goals. Of those, 70 percent sited the need to enhance the cognitive diversity of boards, while almost half said that board diversity is a moral imperative. Barriers to diversity mentioned by 54 percent of respondents were the lack of an open board seat, while 53 percent cited finding diverse candidates that meet the board’s skill needs.
I’m as eager as the next person to see boards diversify and become more representative of current demographics and the investors they represent. But I’m also in favor of building boards with the best talent. As Myatt noted, “You’ll never hear me recommend diversity solely for the sake of checking a box, but when diversity in the boardroom offers so many benefits to the CEO (and to the entire organization) it’s nothing short of irresponsible for chief executives not to place their board composition under the microscope.”
It remains to be seen if recent efforts around board diversity will result in increased shareholder value, but it’s absolutely worth it for companies to look at their entire organizations, from top to bottom, to ensure diversity throughout its ranks. According to Wardell, “Performance comes from finding the best talent. And diversity, at its most basic level, is about increasing the pool of available talented people from which to choose.”
Laurie Berman, lberman@pondel.com
