How Should Corporations Approach Board Diversity?

Ensuring that you have a diverse board is much more than a box-ticking exercise. A diverse board can significantly enhance your company's ability to make the right decision, risk management and overall performance.

However, achieving proper diversity in the boardroom requires more than good intentions – it demands a thought-out, strategic approach. 

Despite increased attention to the issue, progress in board diversity seems to be heading in the wrong direction.

In 2023, the percentage of new board seats in Fortune 500 firms filled by women dropped from 45% to 40%, while seats for racial or ethnic minorities decreased from 41% to 34%. 

The UK, for instance, witnessed a significant drop in the proportion of female and minority ethnic candidates appointed as non-executive directors by large listed companies.

According to executive search firm Spencer Stuart, last year the percentage of non-executive directorships occupied by women declined from 60% to 51%. Moreover, individuals from ethnic minority backgrounds represented 15% of non-executive board appointments, the lowest percentage since 2020.

The reasons for this lag are complex, ranging from entrenched recruitment practices to unconscious biases. However, the benefits of diversity are clear. 

Benefits of diversity

A study by McKinsey & Company found 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.

Three quarters of the board of Microsoft — the second-largest company in the world, so hardly a slouch - identify as diverse.

Professor Randall Peterson, academic director of the Leadership Institute at London Business School, says: “The benefit of having a diverse board is having a range of diverse perspectives. A diverse board helps you to think about problems in an unexpected or creative way. More diverse boards are associated with better performance.”

Or as Dutch politician Frans Timmermans put it, “Diversity is not about image, it's about success. The most successful boards are those that are truly diverse and inclusive.”

What is diversity?

When discussing board diversity, it's crucial to look beyond traditional demographics. While gender and racial diversity are to be encouraged, true diversity encompasses a wide range of factors including age, experience and professional background and industry experience, as opposed to the traditional gravy train of moving from chief finance officer to chief executive. 

Why is this important?

For example, in the tech space, boards might benefit from including members with expertise in emerging technologies such as generative AI and blockchain. 

Similarly, companies expanding into new markets might seek directors with relevant regional experience or language skills.

Professor Peterson points out that too often boards can treat diversity as a checkbox exercise, when what is really needed is diversity of opinion. 

The question to ask is does the diversity of your board help address gaps in functional experience to help you make better decisions?

Says Peterson: “Sometimes ethnic diversity is just not the right fit compared to diversity of experience. You can have a board that looks really good in a photograph but isn’t, in reality, diverse in its thinking.”

Should you set a diversity quota?

Some boards set clear diversity targets and regularly assess progress. This might include annual diversity audits, tracking key metrics, and tying executive compensation to diversity outcomes.

Some companies go further, publicly disclosing their board diversity statistics and goals.

Microsoft publishes an annual Global Diversity & Inclusion Report to measure progress on commitments to increase representation, including at the board level.

However, setting diversity quotas can backfire. 

In 2020, California required public companies to have a minimum number of directors from underrepresented groups, such as Black, Native American, Native Hawaiian and Gay, lesbian or transgender, or face fines of up to US$300,000. According to Professor Peterson, half the organisations preferred to just pay the fine.

In 2008 Norway obligated listed companies to reserve at least 40% of their board directorships for women or face dissolution. More than a dozen countries set similar quotas at 30%-40% in the following five years. However, in Norway the quota prompted some firms to delist rather than comply. Today, the percentage of female board members on publicly firms is still just 7%

Make sure you check out the latest edition of Business Chief and also sign up to our global conference series - Sustainability LIVE 2024

Business Chief is a BizClik brand