Diversity in the Board Room: Why It’s Important, How to Manage It, by Betsy Atkins
Experts on leadership and governance have written extensively about diversity in the boardroom – a seemingly inevitable outcome of today’s global economy, in addition to the wide-spread adoption of diversity as a corporate value. Demographic and governance trends aside, there are compelling business reasons for assembling a diverse set of board members. Nominating committees are more frequently taking proactive measures to increase diverse members in their ranks, in ways that will enhance a board’s overall value to the company.
The Business Case for Boardroom Diversity
From a business standpoint, why is it valuable to have a diverse set of board members? In my experience serving on the boards of a broad range of companies, I see three primary business arguments for promoting diversity in the boardroom:
First, board members from diverse backgrounds can provide direct access to market insight. In many industries, a growing proportion (if not a majority) of purchasing decision-makers are women or minorities. Adding females and diverse members greatly enhances a board’s ability to understand the perspective of its target audience.
Second, diversity supports sound decision-making by augmenting the board’s collective “processing,” which is critical to a well-functioning team. A strong board of directors brings together differing views from different experience bases. Ideally, it should include perspectives from other industries, as well as functional knowledge of topics ranging from branding and marketing to international trade. A broad set of viewpoints provides collective logic and analytics on how to optimize company opportunities and produce the best outcome. Blended views are particularly important in difficult situations or during a crisis, because they help lessen the chance that a board misses an important issue or viewpoint.
Finally, demographic diversity may allow for better insight into two of a board’s main constituents: employees and shareholders. After all, over half of the workforce is female! The investing public is also more heterogeneous than in years past, having grown in the late 1990s to include over 60 million Americans. Investors have continued to grow in numbers and today represent a highly-diverse group.
Clearly a “diverse” board member must firstly bring the requisite experience and skills as a public company director. Then his or her “diverse” background and perspective may be an additive advantage.
Determining and Fulfilling Diversity Requirements
How does a board of directors go about determining which skills and perspectives it needs?
Best practice for public boards is an annual board assessment review. As part of an annual review to optimize performance, boards assess and map existing skill sets onto a matrix and identify potential gaps. In most cases, a lead director or governance chair leads this activity. The boards of a growing number of large public companies are now beginning to rely on the help of a professional outside facilitator to map out various perspectives and background skills and conduct the gap analysis. Boards are viewing themselves objectively and seeing if “Board Renewal” is needed.
The skills and perspectives gap analyses help guide nominating committees when replacing board members who are retiring or rotating out, as they consider requirements. This process helps identify the types of individuals that bring the diversity needed to complement the rest of the board.
Clearly, the next step is to find board members with the targeted backgrounds. The need to build a team of experienced board members who bring judgment is the base line starting point for considering new director candidates. In terms of best practices, I recommend recruiting board members through an executive search firm. In today’s ever-litigious world, an objective, independent process is critical. Use of an executive search firm helps boards avoid the potential charge of cronyism that results from inviting friends and acquaintances to become members. Moreover, an executive search firm makes the board search process more effective by providing access to the broadest pool of talented candidates. Search firms leverage a global candidate pool and bring expertise in identifying and qualifying people with the complementary perspectives required.
Assimilating and Integrating Diverse Board Members
We have already discussed how diverse perspectives and backgrounds strengthen a board of directors through market insight, collective “processing” and problem solving and more accurate representation of the marketplace, customers and shareholders.
How does a board of directors most effectively integrate a member from a different background into the team?
To be effective, directors have to be well-integrated into the organization. A director must understand the company’s industry, its competition and the market. Today boards often conduct regular formal training programs for new directors. The training typically involves meetings with senior management, as well as visits to the company – in some cases, retail stores, manufacturing facilities, etc. As part of the orientation process, boards also encourage new members to spend time with the lead director and/or nominating chair for insight into the team dynamics and its decision-making processes. Having individual meetings with board colleagues provides insight into the board’s “institutional memory”. This integration process typically takes place during a new director’s first quarter.
In summary, bringing diversity into the boardroom benefits shareholders, management and fellow directors by strengthening the oversight team for the enterprise’s long-term growth. Done well, the addition of new more diverse directors strengthens the whole board’s decision-making and value.