Sometimes when a trend begins to change, the original intent and reason for the change can easily get lost in the translation. Is it possible that's what has happened with the issue of diversity on boards? Diversity in the boardroom has no doubt been a hot topic in the corporate marketplace. The term "diversity" has been traditionally and somewhat loosely defined with respect to gender, race and ethnicity. For some individuals, groups and companies, diversity has also been connected with the concept of fairness for legally protected populations.
In many circles, the definition of diversity is trending more toward experiential and cognitive differences. Part of the confusion is that gender, race and ethnicity also contribute in major ways to the experiences people have and the way they think. Some governance experts and companies are trending more toward defining diversity as diversity of thought. The new definition more clearly prioritizes functional and industry experience. That vein of thought may actually be closer to the original intent of diversifying boards, which is to bring as many new and varied perspectives into the boardroom as possible.
What Is the Industry's Perspective on the Definition of Diversity?
Deloitte and Korn Ferry are global management consulting firms that are encouraging corporations to redirect their recruiting and succession planning efforts to weigh more heavily on diverse perspectives, experiences and contributions than on gender, race and ethnicity, although the latter demographics also have a place in the boardroom.
Institutional investors and shareholders don't always agree with the experts, but in this case, they appear to be on the same page. Recently, a group of more than 50 institutional investors with combined capital of over $22 trillion signed on to a set of governance principles. Principle #5 states that boards should adopt structures and practices that enhance their effectiveness, including that "boards should be composed of directors having a mix of direct industry expertise and experience and skills relevant to the company's current and future strategy. In addition, a well-composed board should also embody and encourage diversity, including diversity of thought and background.
Many others in the industry, including financial intermediaries, ratings firms and the media, are changing their definition of diversity to favor diversity of thought, as opposed to diversity of gender, race and ethnicity.
Key regulatory bodies, such as the Securities and Exchange Commission (SEC), give the term diversity an even broader definition of "any differences in the manner in which the nominating committee evaluates nominees for director."
Large corporations also seem to embrace the new definition of diversity. According to mandatory proxy disclosures from some of the largest corporations, less than 45% of the companies held to the traditional gender, race and ethnicity demographics.
What the Statistics Are Saying
In recent years, there's been a slight lag in the rate of women and minorities being appointed to boards. According to Deloitte, there's only been a 2% increase of women on boards since 2015 and women currently only account for 15% of all corporate board seats. Heidrick & Struggles states that the women's share of board seats declined by 2% in 2016 among the premier Fortune 500 companies.
Egon Zehnder reports that the percentage of women on UK boards is down to 29% from 31.6% in 2012. In a multi-year study of ethnic women on boards of Fortune 500 companies, the Alliance for Board Diversity reports that Hispanic women have lost board seats, Asian/Pacific Islander women only hold 3.1% of board seats, and the percentage of African-American males on boards has only increased by 1%.
Is There a Happy Medium Between Gender, Ethnicity, Race and Diversity of Thought and Background?
A negative impact of broadening the definition of diversity has allowed some boards to put gender, ethnicity and race on the back burner in favor of experience-based diversity. Perhaps it's time to consider making meaningful choices based on both definitions of diversity so that boards get the advantage of greater experience and greater minority representation. This approach would require companies to seek out underrepresented groups and view all the characteristics that they bring to the board without bias in any area.
To redesign the process effectively, the nominating committee and other board members would benefit from anti-bias training, expanding into wider recruitment networks, and perhaps having a blind review process in which the committee could remove certain demographic identifiers.
Bank of New York Mellon provides an example of how the two processes could marry to produce the best of both worlds. The company started a specific diversity initiative for minority inclusion in which they factored in experiential and identity-based differences. The bank has 12 directors, and one is Latino, one is African American and three are women. Ten of the directors were appointed after the bank made the change.
Digital Solutions Provide a Modern Governance Approach to Diversity in the Boardroom
Clearly, nominating and governance committees need the help of data and digital solutions to make the most appropriate choices for board director nominations. Diligent and the National Association of Corporate Directors (NACD) have joined forces and created a new digital tool called Nom Gov that provides access to real-time, critical data about board and executive director profiles that include experiential and underrepresented groups. This tool gives nominating and governance committees a complete set of data to enhance their succession planning efforts by giving them an extensive, global database of thousands of board director and executive candidates where committees can do a customized search by various demographics.
Ultimately, nominating committees can have the best of both worlds. With access to a database of candidates around the world, nominating committees can form a board composition where they have the ideal experience and perspectives, in addition to having a diverse board that reflects the advantages that women and minorities can bring to the boardroom.
