Over the past few years, companies have made strides in diversifying their board composition. Unfortunately, the speed of the change is lagging. According to Institutional Shareholder Services, just twelve and a half percent of corporate board directors are from underrepresented racial groups, even though these groups represent 40% of the US population. While this is up 2.5% from 2015, board diversity still has room to improve.
The federal government is looking at statutes to mandate corporate board director diversity, and a dozen states have either enacted or are in the process of enacting diversity requirements. The legislation is being driven by data that shows that diverse boards improve financial performance and also improves governance.
So while progress is being made, what is slowing the initiatives to improve board diversity? Male directors believe there simply aren’t enough qualified directors from underrepresented groups, whereas female directors think it is a lack of prioritization by boards and executive leaders. According to a recent HBR article, data from their Annual Corporate Directors Survey shows that directors do want diversity but need to address four common obstacles.
Traditionally, board turnover is low. In a given year, you can estimate that half of the publicly-traded companies won’t make any changes to their board. To address this challenge, and increase diversity, you can simply add a new board position, whether permanent or temporary that becomes a permanent role when the next member steps down. This is a simple way to improve board diversity in the near term.
Looking longer-term, a balance needs to be considered between the institutional knowledge gained through long-term directors and bringing in new perspectives that mirror the pace of change companies face with today’s technology. One way to do this is to create proactive policies that improve succession planning through routine turnover.
The article states that the majority of board members don’t believe that gender or racial/ethnic is “very important” to their board composition. This level of inertia can be hard to overcome, but institutional investors and other stakeholders can exert their influence to force change. The call for diversity has reached a tipping point and those companies that continue to turn a blind eye to their diversity makeup could soon be facing serious challenges.
Limited Candidate Pools
The idea that there are not enough candidates from underrepresented groups is a fallacy. A simple step to take is to look beyond the c-suite. There are numerous candidates who have the capabilities required to be a board director, even if they don’t have a c-suite title. Additionally, some people assume that directors should be retired executives. With the pace of change, these people, while experienced, are quickly out of date with their operational expertise. Active executives are better able to assess challenges and provide solutions.
Inadequate Succession Planning
Succession planning is not typically top of mind for boards and only addressed when a director is about to step down. A third of the board members surveyed said succession planning is ad-hoc, and more than half said that the plan was not shared with the whole board. The lack of an effective succession plan means that candidate identification and recruitment is limited, further impacting the ability to find candidates from underrepresented groups. Developing and sharing succession plans should be mandatory for all boards. This allows for adequate time to identify and vet candidates.
We know that companies are being asked more than ever before to take a stand on social issues. Doing this in earnest requires starting internally and addressing the diversity in-house. If you have questions about board recruitment or how to improve board diversity and create a culture of diversity, let us know how we can help.