Director Tip Sheet: Filling in the Missing Pieces on Boardroom Diversity has been saved
Director Tip Sheet: Filling in the Missing Pieces on Boardroom Diversity
As published by National Association for Corporate Directors, NACD NXT site
By Deborah DeHaas, Debra Everitt McCormack, and Samantha Yiu
Despite a few gains for some demographic groups, the findings of the Missing Pieces Report: The 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards indicate that progress on board diversity remains slow. This news comes amid converging trends that are pushing public-company boards to diversify more quickly. Among them are shifting US demographics and a growing body of research that links greater diversity with stronger value creation and risk mitigation. In response, investors and some state legislatures are increasingly urging public companies to enhance efforts around diversifying their boards or risk negative proxy votes and/or monetary fines. These developments collectively suggest that pressure to accelerate boardroom diversity is unlikely to abate anytime soon.
This tip sheet offers guidance on the following topics:
- The current state of diversity in the boardroom
- How to make the business case for greater board diversity
- Methods for building urgency around diversity and inclusion
- Tips for accelerating minority and women board representation, or "filling in the missing pieces faster"
The current state of boardroom diversity
Where are we now?
Minority and female representation on Fortune 500 boards is increasing, but it is not keeping pace with shifting demographics in the United States. The Missing Pieces Report, a multiyear study published by the Alliance for Board Diversity (ABD) in collaboration with Deloitte for the 2016 and 2018 censuses, further illuminated the slow progress made in diversifying boards since 2010.
Here are some of the study’s most compelling findings for the Fortune 500 in 2018:
- Board representation of women and minorities reached an all-time high of 34 percent (1,929 board seats), compared to 30.8 percent in 2016 (1,677 board seats).
- Total minority representation increased to 16.1 percent (912 board seats) from
12.8 percent in 2010 (700 board seats).
- Caucasian/White men hold 66 percent of all board seats, and 91.1 percent of chair roles on those boards.
- The "recycle rate" for minorities—the rate at which individuals serve on more than one board—increased from 2016 to 2018. African American/Black women and Hispanic/Latinas have recycle rates of 1.39 and 1.36, respectively. African American/Black men hold the highest recycle rate of any group (1.41), whereas Caucasian/White men have a recycle rate of 1.19.
While advancement has been slow, the pace of change is accelerating. The number of board seats in the Fortune 500 increased from 5,440 in 2016 to 5,670 in 2018, suggesting that some boards may be adding seats to accommodate the broader set of skills, thoughts, and experiences necessary to govern a complex company in today’s disruptive environment. This expansion, in turn, may be creating new opportunities for diverse candidates to take a seat at the table. Despite these positive trends, high recycle rates and overboarding1 among women and minorities remain a concern, meaning that boards tend to tap into a pool of experienced directors to fill open seats, instead of looking beyond their established networks to find new talent.
Why has progress been so slow?
A lack of urgency from the top (i.e., the CEO and/or board chair) and slow director churn are some of the greatest challenges to improving diversity. Some boards may be unwilling to ask incumbent directors to retire, even if their skills are no longer fit for purpose, resulting in few openings for diverse candidates with desirable skills. additional perceived barriers to progress include these:
- Some see "a small pool of diverse candidates" as part of the problem, while others consider this an excuse.
- Closed networks can also serve as a barrier. Board nominations can often be a “relationship game,” with incumbent directors relying heavily on their existing personal and professional networks.
- A formulaic approach is another hurdle. Having an overly prescribed approach to recruitment and/or renomination doesn’t necessarily produce a high-functioning board. Qualities that are independent of demographics and skillsets, such as integrity, forthrightness, and cultural fit, should also be considered.
- Effective boards are often hesitant to disturb existing dynamics, viewing the call to diversify as an attempt "to fix what isn’t broken."
Who or what is driving change?
The investor community has been at the forefront in advocating change on a host of issues, from diversity to sustainability. That said, employees and customers are also intensifying pressure on boards to diversify. For now, institutional investors appear to be making more inroads and having a greater influence on board composition. BlackRock, State Street Global Advisors, The Vanguard Group, and the California State Teachers’ Retirement System (CalSTRS), for example, have become increasingly vocal, speaking out through public relations and media campaigns on the importance of diversity as a governance imperative.2
Diversity Quotas on the Horizon
Following California’s lead on mandating gender diversity for public-company boards, New Jersey has introduced a bill that would require public companies based in the state to have a least three female directors on their boards by 2021.3 Several other states, including Illinois, Massachusetts, and Pennsylvania, have passed nonbinding resolutions urging companies to diversify their boards.4 These legislative mandates have produced a strong reaction in the business and corporate governance world. Detractors perceive mandated diversity quotas as government overreach, while supporters believe these will have a positive effect on board refreshment.
Making the case for greater diversity on boards
Diversity has to be about adding value. It increasingly needs to be discussed in terms of a business case or return on investment, not simply because it’s the right thing to do. General statements like "diversity has been proven to enhance performance" do not sufficiently demonstrate the value proposition. In promoting diversity, directors and senior executives can consider the following guidance:
Leverage the growing body of research that articulates the value of diverse perspectives in the boardroom. In addition to qualitative observations, use quantitative data from trusted sources, like those listed below, to explicitly make the link between diversity and improved financial performance and risk mitigation.
- The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004-2008), Catalyst, March 1, 2011
- Delivering through Diversity, McKinsey & Company, January 2018
- "Female Directors, Key Committees, and Firm Performance," The Department of Economics, Lancaster Management School, October 19, 2015
- The Impact of Board Gender Composition on Dividend Payout, SSRN, October 1, 2016
- "The Diversity and Inclusion Revolution: Eight Powerful Truths," Deloitte Review, Issue 22, January 22, 2018
- Missing Pieces Report: The 2018 Board Diversity Census of Women and Minorities on Fortune 500 Boards, Alliance for Board Diversity and Deloitte, 2018
Tie diversity to growth opportunities and market risks. Ask questions such as: How can our company better position itself to expand its existing business or enter into new markets? Are we at risk of losing ground if we don’t have people on our board/management team who reflect the composition of, and have greater insight into, our customer base, workforce, and other stakeholder groups?
Link diversity to talent. Given the growing war for talent, diverse companies with inclusive cultures will likely be better positioned to attract, recruit, and retain the next generation of employees, as well as to deliver on economic performance and shareholder returns. Ask questions such as: How can our company better position itself to attract highly sought-after skills in a fiercely competitive marketplace? Could we be ceding the best new talent to our competitors because we don’t fully understand how to effectively incentivize or motivate next-generation employees?
Building urgency around diversity and inclusion on boards
Boards may recognize that diversity is important, while also lacking a sense of urgency around this issue. Individuals may initially resist change, especially when they think that they have something to lose. Directors can soften that resistance and build urgency for change by being thoughtful and intentional about how they broach the subject.
It’s not necessarily what you say, but how you say it. Phrase the problem in terms of "the lack of diversity and inclusion on boards" rather than "we have too many men."
Talk about updating the board refreshment process, rather than replacing or adding directors. Create a bridging narrative outlining the type of talent needed not only for where the company is today, but also for where it is headed. Acquiring this talent may require the board to broaden its refreshment processes.
Use the imperative for broad generational perspectives as a starting point. Boards are increasingly prioritizing new areas of expertise, such as industry or functional experience in emerging technologies, digital transformation, and the future of work. Many of these desirable skills are found across generations. As society experiences demographic shifts, generational diversity is becoming just as important as other forms. Because generational diversity can be an important component in attracting new hires, the imperative for broad generational perspectives can be a good conversation starter for raising the overall topic of diversity.
Filling in the missing pieces faster
Directors may think responsibility for board diversity should be delegated entirely to the nominating and governance committee; however, making a lasting impact will require buy-in—or, at a minimum, acceptance—from all members of the board. Given the links between diversity, fiduciary responsibility, and risk management, every director has a responsibility and an opportunity to influence boardroom change by becoming involved in the search and succession-planning processes.
Look for skills and competencies, not titles. Roles and titles can often prevent boards from identifying candidates with the requisite skills and competencies to serve in a specific capacity. For instance, male chief executives continue to far outnumber their female counterparts. If a board limits its search to individuals with CEO experience, the candidate pool is automatically narrowed. Instead, boards should consider broadening the search criteria beyond CEOs and other C-suite executives and explore nontraditional avenues for finding candidates, such as the military, the public sector, academia, the legal field, etc. Boards should also be intentional about aligning terminology and allowing for some flexibility in evaluating a candidate’s experience, to reduce the likelihood that qualified individuals are overlooked. For example, in the military, there are numerous logistics experts, but in the private sector, this expertise is often referred to as “supply chain.”
Be inspired by the “Rooney Rule.”5 To become a strategic asset to their companies, the board’s composition will need to evolve alongside the company’s current and future needs. As such, boards should first and foremost recruit for the right skills and experiences to support the organization’s strategy. In that pursuit, directors can be inspired by the “Rooney Rule,” which calls for the inclusion of a diverse slate of candidates for every opening. Accordingly, they should champion broadening the pool of qualified candidates so that more diverse candidates are not only present at the beginning of a search but also considered throughout the process. Recently, the Goldman Sachs Group implemented its own version of the Rooney Rule, requiring managers to interview two diverse candidates for any open position.6
Develop a robust pipeline by playing the long game. It’s important for companies and their boards to build long-term relationships and engage with diverse candidates before the need arises. For example, experienced directors can identify and mentor executives from under-represented groups who have the potential to serve on a board in the future. A strategic plan that involves a mentoring program can accelerate board-refreshment processes, and may mitigate a skills shortage when a significant number of current directors retire.
Regularly review refreshment needs and practices. What can be done to stimulate board refreshment? Boards are increasingly implementing mandatory retirement ages that typically range from 70 to 75 years old. Term limits are also increasingly being considered, and are generally perceived to be a viable option if imposed up-front, rather than retroactively. Many interviewees, however, believe that intentional succession planning is the real secret to effectively accelerating minority and women representation on boards. Frequently, boards do not dedicate adequate time to their own succession planning. Directors should consider periodically evaluating their succession strategies to align them with the company’s strategic direction and anticipate departures. Boards may want to leverage a skills matrix to understand the gaps in competencies, experiences, and perspectives that would occur if any given director resigns. Should a departure occur, boards can consider a diverse mix of candidates to fill the opening.
Develop rigorous full-board, committee, and individual assessments. Such assessments are sometimes seen as a more-effective alternative to term limits. While most public companies conduct annual assessments, these can reportedly be perfunctory (e.g., limited to a written questionnaire that seldom changes) and/or only focused on the full board. In contrast, some companies conduct “deep-dive” assessments, which are often led by outside facilitators. These in-depth assessments frequently examine individual contributions and skill sets by conducting interviews with each director, and even members of management who report to the board. They also include detailed reviews of board and committee effectiveness, drawing on interviews with the board chair, lead director, and committee chairs. Performing such reviews at regular intervals can set expectations with candidates up-front that directors serve as long as they add value, but eventually, they may need to step aside as a result of evolving board needs. This further reinforces the notion that a directorship is not a life-tenured position.
Robust Evaluation Processes as a Conduit for Board Refreshment
Enhancing board effectiveness is increasingly becoming a focus for companies and their shareholders. As detailed in a report issued by the CII Research and Education Fund®, an affiliate of the Council of Institutional Investors, robust evaluation processes provide an important means of accelerating board refreshment and succession planning, since companies require new skills, perspectives, and strategies over time.7 Although investors generally do not expect boards to reveal the specific details of any evaluations, they do generally expect them to disclose the processes by which they evaluate themselves and identify improvement opportunities. Many Fortune 500 companies now describe in their proxy statements what these assessments entail, of which the report provides several leading-practice examples.
1 Overboarding refers to stretching one’s time and energy too thin by serving on several—arguably, too many—boards at once.
2 NACD, Investor Perspectives on Board Diversity (Arlington, VA: NACD, 2018).
3 Jeff Green and Andrea Vittorio, “New Jersey Follows California in Measure to Add Women to Boards,” Bloomberg, December 21, 2018.
4 Iris Hentze, “Gender Diversity on Corporate Boards: What Will 2019 Bring?,” posted on the National Conference of State Legislatures’ Blog, January 4, 2019.
5 Named after Dan Rooney, the former owner of the Pittsburgh Steelers and former chair of the National Football League’s diversity committee, this rule requires member teams to interview at least one minority candidate for head coaching jobs and senior football operations positions.
6 Liz Hoffman, “Goldman Sachs Implements Its Own ‘Rooney Rule’ in Diversity Push,” The Wall Street Journal, March 18, 2019
7 CII Research and Education Fund®, an affiliate of the Council of Institutional Investors, Board Evaluation Disclosure, January 2019.
As published in 'NACD Directorship' magazine, The Power of Difference supplement, September/October 2019
As published in 'NACD Directorship' magazine, September/October 2019