How much is “enough” diversity? To be sure, diversity improves board performance. This premise is widely accepted from a range of stakeholders – from board chairmen, to investors, to key influencers and even regulators. Recognizing its potential, most boards aim for a simple (in concept, anyway) diversity strategy: get more. Yet no one is – or should be – satisfied with the progress made on board diversity.
The more strategy leads to a lot of effort to meet or exceed the established benchmark. For example, women now represent 20% of Fortune 500 board directors – if a board of ten people has less than two female directors, they might consider adding one female. Is the board done diversifying now? Without any way to define world class diversity, boards – even very well intentioned boards – end up diversifying to minimally-accepted levels. More – which requires adding a new person (even in backfill situations) – also feels disruptive to a community that values continuity.
In an effort to help clients find more productive diversification methods we recently studied all corporate directors in the Fortune 500 (in total more than 4,800 board seats). As we looked at individual directors and their backgrounds, some findings were not altogether surprising. Despite steady progress (example: nearly 20% of Fortune 250 boards have at least 2 African American directors, up from 7% in 2014) much work remains to be done (example: only 14% of Fortune 500 directors are ethnically diverse).
But we also measured what inclusive processes boards were using to set the right conditions for diversity to take hold and have the intended effect. For instance, how diverse was board leadership (to include key committees)? Do boards ask directors to change roles and contribute fresh perspectives with any regularity? These actions, one might argue, in and of themselves likely diversify the way a board executes its oversight mission – without ever adding a new person – and, as such, warrants measurement.
What surprised us was a modest positive relationship found in the data between otherwise independent variables. Within certain bounds, boards who change roles more frequently have a higher total diversity (defined as number of ethnic minorities, women, and foreign nationals) and leadership diversity. The latter makes some intuitive sense, as more frequent changes mean greater opportunities for consideration for bigger jobs. And, it turns out, roles matter. When diverse individuals chair the Nominations & Governance committee, for instance, the overall board is markedly more diverse. Boards with a female Nominations & Governance Chair have, on average, 23% females (versus 20% overall). Boards with an ethnic minority Nominations & Governance chair have, on average, 17% minorities (versus 14% overall).
This positive relationship does have limits. Too much change can actually reduce overall diversity. In our analysis, this point of diminishing returns typically started to appear when more than 35% of the board roles changed over a 3 year period. This too makes intuitive sense. Boards that turnover too frequently likely lack the discipline to engage in sustained succession planning required to find the best diverse directors.
What this data tells us, though, is that a strategy of more is necessary but insufficient to sustainably diversify. The best boards also incorporate inclusive methods into their day-to-day governance processes.
Additional examination is needed – surely there are other indicators of board inclusiveness or board roles that positively influence diversity. But it’s clear scrutiny matters (it’s no accident the biggest and most visible boards are the most diverse) and at minimum boards should consider measuring their degree of inclusiveness.
By Charles A. Tribbett, III
Source: Russell Reynolds Associates: An Examination of Board Diversity, 2015