Diversity is one of a handful of hot issues in board governance today. Yet, diversity, as it stands alone, is a very broad topic. To some, diversity means gender diversity, as there's a huge push to bring females onto boards of directors. To others, board diversity refers to racial or ethnic diversity. In a general sense, diversity means composing a board that has a diverse set of skills, talents and abilities. With the omnipresent risks related to cybersecurity and the Information Age, boards are considering the physical age and technological ability of prospective board directors. Then, there's the issue of independence and the trend toward developing boards that are composed mostly or solely of independent directors.
In reality, each of these categories of diversity should be viewed separately and together for boards to make the wisest decisions about how to compose the most qualified board that can take them to the highest level of success.
Avoid the 5 Biggest Mistakes Board Make About Diversity
1. Undervaluing the Diversity of People and Perspectives
Technology and transportation have helped to connect people across the miles. In the United States and in many other countries, it's becoming a greater melting pot of cultures and ethnicities. As people from different backgrounds attempt to live and work together peaceably, it's necessary to have an understanding of different perspectives to prevent harmful stereotyping and personal biases.
Cultural diversity brings different ways of thinking and different ways of being that aren't our own, or perhaps anything even familiar to us, into our boardrooms. Accepting and honoring different perspectives help to build trust and respect between people with different lifestyles and that provides a good foundation for businesses that serve all kinds of people.
While it's important to recruit board candidates from varying cultural backgrounds, it's also important to look for other talents, qualities and abilities that they bring to the table, as well as knowledge about the company and its operations.
It's not enough to appoint board directors who bring cultural and ethnic diversity to the table, boards need to vet them carefully so that they're capable and willing to communicate diverse thoughts and opinions, even if they're in the minority.
2. Failing to Connect Gender Diversity with Success
According to a report called 'Diversity Matters,' companies that made efforts to have larger numbers of women on their boards and in leadership positions were 15% more likely, on average, to have financial gains within their industries that were above the national average. Despite women serving in leadership positions demonstrating a connection with higher gains, the same report notes that women are under-represented across the board.
Gender diversity starts at the top and it's important at other leadership levels as well. Companies can get ahead of the curve by factoring gender diversity within various departments and operations and making it a part of the corporate culture. Some of those women will surely rise to the top and contribute to the success of the company at a future date in time.
According to the 'Diversity Matters' report, only about 16% of corporate executive positions are filled by women. Boards could be and should be doing more to identify leadership talent among women.
3. Passing Over Novice Board Directors with Technical Expertise
As board directors retire or age out, they're making room for a new wave of Next Generation board directors. What they lack in board and industry experience, they often more than make up for with regard to their technological prowess and expertise.
Boards in today's corporate world have to deal with modern issues like cybersecurity, technology, environmental concerns, social concerns and evolving governance concerns. Board candidates from the Next Generation and Millennial populations have grown up with these issues.
Boards should be careful about hanging onto longtime board directors who lack participation and commitment and be on the hunt for younger board candidates who have technical expertise and have the potential to be trained in the finer points of board duties and responsibilities. Adding first-time board directors to the board will help to provide leadership over nontraditional matters. As a note of caution, boards may need to invest a little more time upfront in onboarding, mentoring and training.
4. Focusing Board Tenure Rather than Board Refreshment
Pressure from regulatory bodies and shareholders is challenging boards to look at establishing term limits to deter career board directors from holding board seats without providing value to the board. Boards that change their age limits to accommodate existing aging board directors is frowned upon. In an effort to ensure that companies have refreshed boards, shareholders and regulators are also requiring or insisting that boards evaluate themselves in a transparent manner to ensure that they have the types of skills needed to oversee the company.
It's helpful for boards to set up a matrix during their annual board self-evaluation to assess the level of gender diversity, racial diversity, ethnic diversity, skills and talents so that they can visualize gaps. According to the 2018 United States Spencer Stuart Board Index, about 96% of boards set their mandatory retirement age at 72 years of age.
5. Failing to Link Diversity to Performance
Harvard Business Review did a survey of 1,700 companies in eight different countries around the world regarding diversity in management positions. The survey made inquiries with respect to gender, age, national origin, career path, industry background and education. The compared the answers with the percentage of revenue that netted from products that were introduced over the last three years.
The results were clear. Based on those six dimensions, the companies that had the most diversity had 19% higher revenues than their competitors. In addition, the research showed that the most diverse companies were also the most innovative. Overall, the study showed that all companies in all countries could benefit by increasing diversity on the board and within management positions.
Studies show that there's a strong connection between diversity and corporate profitability. The results support the stance of shareholders and regulators to apply pressure on boards to improve their performance by increasing diversity. Diversity is more than adding a board seat or filling a seat to accommodate a female board director. Rather than taking an 'If it's not broke, don't fix it' approach to board composition, the modern governance approach is to create a matrix of needed skills, talents, abilities and categories for diversity and give meaningful thought to board composition based on the board's self-evaluation.