How to increase board diversity and its importance

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How to increase board diversity and its importance

By iDeals Board
September 20, 2023
12 min read
A diverse board of directors around a table during a meeting

Are you wondering why and how to increase board diversity? Or what exactly board diversity is? Is it just the latest social trend — or does it actually have a positive impact on corporate boards? Should you be working on increasing diversity in your board of directors, and if so, what is a good way to go about it?

Long story short, knowing how board diversity affects governance is crucial. For instance, as Harvard’s career expert Heidi K. Gardner points out, women leaders are likely to spend twice as much time on collaborative efforts that fall outside of their formal job description. 

That said, board diversity matters — and this article suggests a few insights about it. 

What is board diversity?

Having a diverse board means your board is heterogeneous when it comes to board members’:

  • Sex (gender diversity)
  • Age
  • Ethnicity and race (racial diversity) 
  • Social and professional background

A diverse board includes a significant number of men and women who come from various professional backgrounds, belong to different races and ethnicities, and are in different social and age groups.

The importance of diversity on boards of directors

It’s only natural to stick with what – and who – we know.

Psychologically, even if it’s to one’s own detriment, people prefer familiar surroundings. All it takes is assessing one’s own group of friends or peers to confirm this notion. 

Unfortunately, the above approach frequently spills into the workplace, at the expense of a business’s overall health. It’s a problem that must be fixed from the top—specifically in the boardroom with the board of directors. Many corporations promote diversity and inclusion in lower-tiered departments but balk at the very idea when it comes to those power positions. Mainly because these companies turn to their own board members to make hiring decisions.

The fact that 15% of board seats at the top 200 companies in the S&P 500 are held by racial minorities further highlights these diversity issues.

It’s an understandable faux pas. Selecting ‘who we know’ to take up those prominent board position offers security and comfort regarding matters like trust and competence. Still, it’s a short-sighted mentality in the big picture. 

A lack of diversity on boards of directors impedes the cultivation of ideas and practices that might help a company’s overall growth. There’s a reason that businesses with diverse leadership teams have 19% higher revenue than those without.

While the laws certainly act as motivators for boards to become more diverse, it’s not a matter of mere optics. There’s a proven impact on bottom lines that corporations can’t neglect.

A board of directors consisting of a group of people from the exact same walks of life won’t provide enough backgrounds, perspective, and angles with which to assess strategies and problems. Whereas, a group of people sharing different races, ages, and genders provides far more cognitive processing and exchanges of information.

To further elaborate, with three or more women on a board of directors comes a shift in culture that focuses on collaborative efforts

According to some studies, companies with one or more women returned a compound 2% more than those without. The same research also points out that these companies benefit from higher valuations and increased payout ratios.

What are the benefits of board diversity?

The first reason why board diversity matters is quite simple: as research quoted by McKinsey shows, more diverse boards make better business than less diverse ones.  And though direct causality has not been proven yet, many studies show strong indicators that this is more than mere correlation. 

The second reason is that — if your corporation is concerned with social responsibility, or if it’s a non-profit — board diversity brings about a number of non-financial benefits too

Let’s have a look at some of the benefits of improving board diversity.

Insights into diverse markets and customers

If your board includes for instance a significant number of women, or people from ethnic minorities, it will be able to count on their insights into the preferences and culture of those social groups. This will help the corporation better understand how to work with them as partners and serve them when they’re customers.

Better decisions

People from different backgrounds and experiences bring new skills and competencies to a board. They may identify problems or suggest solutions that would remain unperceived and unthought-of if the board were to have a more homogenous composition.

Greater creativity and innovation

A homogenous board can tend to groupthink and never try anything new. Throw different people into the mix, and you greatly increase the chances of some really creative ideas coming out of your next board meeting.

Greater social responsibility

It’s harder for a corporation to champion social responsibility if all its board members are far removed from the consequences of social issues. Diverse board members can help eliminate this problem because they have a more direct experience of certain social problems.

Increased trust and better reputation

When a board has larger knowledge and deeper insights, takes better decisions, is more creative, and takes responsibility for how its actions affect society, it’s natural that stakeholders will trust it more and that the company’s public reputation will improve.

See how we can support your board meetings

Common challenges for implementing board diversity

According to this 2021 Forbes article, “under-represented ethnic and racial groups make up 40% of the U.S. population but just 12.5% of board directors“. But why? 

The main reason why corporate boards lack human diversity it’s a very human one: inertia. Most people naturally tend to avoid discomfort, which means we avoid extra effort and change. So we keep in a state of inertia, doing something just because it’s what has always been done. 

But what are some of the specific obstacles to having a diverse board — the most common reasons and excuses people give for not implementing board diversity?

Too few diverse candidates

Board members would like to invite more women, and people from different ethnic and professional backgrounds, to join the board. But it’s hard to find diverse candidates with the right professional qualifications in those groups.

Limited networks and recruitment practices

The system for choosing new board members makes it difficult to find and choose people with diverse characteristics — members invite people they already know and network with, but they tend to network with those who are similar to them.

Unconscious bias and stereotyping

Existing board members aren’t even aware that they automatically disconsider certain candidates just because they are women, or because they have a different education or social background from most of the board.

Incumbent board members’ unwillingness to change

Existing board members are aware their prejudice makes them lean towards a specific type of candidate to the detriment of the others — but they don’t see that as a problem for the board or the corporation.

Conflict is a good thing

A boardroom filled with directors who always agree with one another is likely a sterile environment. What’s the point of board meetings without any back-and-forth?

In many cases (provided it doesn’t lead to resentment or boiling tensions) conflict only serves to improve a business.

Conflict stimulates different ways of thinking and creates new perspectives and paradigms that, otherwise, would never come into play.

Furthermore, conflict within an organization raises questions about processes and procedures. Many corporations operate in ways just because “that’s how they’ve always done things.” Board members and executives being complacent can sink companies fast. As a business continues to grow, how things get done should always come into question.

This productive form of conflict can only exist with a diverse boardroom instead of a place where all directors are mirror images of one another.

8 efficient ways to increase board diversity

We’ve gone over the benefits of board diversity, and checked which challenges you are most likely to encounter when implementing it. Now let’s have a look at possible ways to improve board diversity. 

1. Audit the diversity of your board
2. Establish diversity targets
3. Enlarge the pool of qualified candidates
4. Make inclusion a part of your corporate culture
5. Educate your board about unconscious bias
6. Conduct blind candidate evaluations
7. Use the best tools to achieve a diverse board
8. Track and measure progress

1. Audit the diversity of your board

Knowing the terrain is the first step to any successful strategy. Map your board members, find out how much racial and ethnic diversity you have, and whether there’s room for improvement. 

2. Establish diversity targets

The audit has exposed a few deficiencies in your board when it comes to diversity. Now you can draw a board diversity policy. Decide on criteria — for instance, do you want your board diversity to mirror the diversity of your country, your company, your client base? — and set concrete goals to be attained within a specific time frame. 

3. Enlarge the pool of qualified candidates

If you find no suitable diverse candidates within your usual candidate pool, work on enlarging the pool by making your selection criteria more flexible. Focus on the person more than on their professional experiences and qualifications. For instance, you might consider people who have never been a C-suite executive, but who have a proven record of being knowledgeable, intelligent and collaborative.

4. Make inclusion a part of your corporate culture

If you really want a more diverse board, you will get there much quicker by fostering inclusion at all levels and in all departments in the company. You can for instance foster age inclusion by creating a mentoring program where members of senior management mentor junior employees.

5. Educate your board about unconscious bias

This can be a part of the previous step. Often we make groundless assumptions or hold random beliefs that we are not even aware of. It can be worthwhile to talk to your board about this, to help them see beyond the usual sex, age, and racial and social categories when it comes to choosing new members.

6. Conduct blind candidate evaluations

If your diversity audit has shown that your board skews too aged, or too white, or too upper class for instance, you can take action and change your evaluation method. Analyze based on a CV that includes their professional experience and accomplishments — but omits their age, race and social background. This will make diverse candidates more likely to be immune to bias and prejudices.

7. Use the best tools to achieve a diverse board

Any task is easier to accomplish when you use the right tools. Board management software makes it easy for you to create a database of board members’ profiles, and extract diversity information from them. This way you can run your diversity audit and keep track of progress as you implement your board diversity strategies.

8. Track and measure progress

Keep track of the results of your board’s efforts towards diversity. You will more easily identify gaps, spot obstacles that need to be addressed, and the board will be more motivated by being aware of its progress towards becoming a more diverse board.

Board diversity examples

Intel

In 2015, Intel decided to increase the number of women and underrepresented minorities both in its workforce and in leadership positions. The company established a $300 million initiative called Diversity in Technology, which included efforts to increase diversity in its board of directors. The next year, Intel added two new directors to its board, and three years later, half of the company’s board was made of women and underrepresented minorities.

PepsiCo

This company already has quite a diverse board – out of 13 members, four are women, three are Black, and two are Hispanic. Now PepsiCo is working on reaching the goal it announced in 2020 – to expand diversity beyond the boardroom and onto managerial positions. They are working with historically Black learning institutions, as well as Hispanic organizations, in order to increase the number of Black managers by 30% and Hispanic managers by 10% until 2025.

Nasdaq

In order to foster diversity on company boards, this stock exchange market passed a resolution in 2021 demanding that for a company to be Nasdaq-listed, it must disclose its board diversity statistics. And not only that – it must have at least one director who is a woman, and one who comes from an under-represented minority, or else present an explanation for not having one

Diversity on Boards of Directors is Becoming Mandated Throughout the World

Boards will eventually suffer financial consequences for failing to diversify, with governing bodies slowly but surely intervening. 

In 2018, California mandated that each board must consist of at least one female. By 2021, it’s expected that the state will invoke a bylaw dictating that boards of 5 (or more) directors must have at least 2 or 3 women

These laws are quite common across the world. Boards must consist of 40% women in Norway, for instance.

In short

  • Board diversity is important not because it makes a corporation look good (though improving your reputation is always great!), but because it actually expands the board’s knowledge pool and helps it make better decisions.
  • There are many approaches to how to increase diversity on a board, such as establishing targets,  enlarging the candidate pool and fostering inclusion company-wide. It’s important you develop a diversity strategy that uses the most appropriate tactics for your company.
  • One way you can start the process of increasing diversity in your board is to use board portal tools to run a diversity audit, then place diversity on the agenda of your next virtual board meeting.
The iDeals board portal is one you can use in all confidence, as it offers you a great number of board management tools besides the ability to run paperless board meetings.

FAQ

What is board diversity in corporate governance?

A diverse board is one that is composed of qualified board members of both sexes, from various races and social groups, with professional experience and accomplishments in different areas of knowledge.

How does diversity improve board performance?

Diverse members bring to the board a wider range of experiences, qualifications, and insights. This helps the board make better decisions.

How do you measure board diversity? 

Board diversity is about humans, so it’s not an exact science. But you can measure it by analyzing members’ profiles according to diversity criteria, which include sex, age, race and ethnicity, social background, and professional background.

How can you require more diversity on your board?

You can bring up the subject during a board meeting. Help the board see a board diversity policy not as a burdensome political requirement, but as an element that will greatly improve board decision-making and efficiency. And build it from there.