November 8, 2018 – Diversity starts at the top of every organization – that’s the hope at least. According to recruiters polled in a recent informal survey conducted by Hunt Scanlon Media that oftentimes means it begins in the boardroom. Diverse boards make better decisions and lead to improved company performance, they said. Yet despite the research, validation and prodding by institutional investors, a revealing 1,805 companies out of 3,192 (companies from the Fortune 1000 and Russell 3000) in a gender diversity index created by 2020 Women on Boards have zero or just one woman on their boards. The case is similar for African Americans, Hispanics and Asians as well.
So what’s the problem? What’s holding back from the progress that businesses and society would clearly benefit by? “As we live in, and businesses function in, a diverse world and marketplace, having such diversity reflected in companies can add meaningful insights to decision-making and strategic planning,” said Patricia Lenkov, founder of Agility Executive Search. “Inclusion implies that many different types of people can strive to attain leadership roles within the organization. In other words, success is open to all.” That, she said, makes it equitable and the hallmark of a true meritocracy.
In order for boards to become more diverse, nominating committees should initiate a few new approaches to the hiring of new directors,” said Carrie Pryor, managing director of executive search firm Greenwich Harbor Partners. “One of those approaches is to expand beyond the informal process of using the personal networks of existing board members to source potential candidates; that only results in the nomination of very similar individuals and the perpetration of outdated networks,” she said. “Nominating committees should use the hiring opportunity to have a neutral third
“Having more than one or two retired CEO’s who are not actively involved with on-going businesses makes a board less effective,” she added. One or two retired CEOs can serve as consiglieres to the current CEO – but more than that number reduces the number of directors who are facing real world, day-to-day challenges of managing a business.” The added plus, she noted, is that functional leaders have a greater chance of being diverse in terms of ethnicity and gender.
“We strongly recommend raising the number of diverse candidates to a minimum of three people,” she advised. “The highest performing boards mirror their customer base. This truism applies to companies across all industries and geographies.”
Katherine Young, president and managing partner of boutique recruiting firm Young Search Partners, said that “companies with women on their boards have higher returns on investment, lower relative debt levels, higher stock valuation and higher average growth. Companies with at least one to three women directors on their corporate boards perform better on a range of measures, including more ethical corporate governance practices.”
Ms. Young should know. She sits on the board of Women Executive Leadership, a non-profit affiliated with 2020WOB that shares their mission to increase gender diversity in the board room. “Board diversity is now becoming a mandate in the boardroom – and for the right business reasons, not diversity for diversity’s sake,” she said.
“Companies with women directors and executive officers send a clear message to their shareholders and employees that they value diversity and experience,” Ms. Young said. “Women bring different and valuable perspectives to the challenges faced by corporations. Diversity of thought leads to innovation and better decision-making.”
Ms. Lenkov, who is well known for her work on board diversity and sits on the New York Steering Committee of 2020 Women on Boards, offers three main explanations for the lack of progress:
Legacy folklore portends that qualified diverse candidates for board seats are lacking. “We have heard this time and again,” said Ms. Lenkov. “In 2013, when Twitter went public without one female on their board they said that they could not find women who had the technical skills necessary for this technology company. In fact, most of their board members had arts degrees.”
Demand and the opportunity to diversify boards is also hampered because director tenures are often too long. The concept of board refreshment or even board turnover and succession planning are new. Not long ago, board appointments were often thought to be for a lifetime.
In spite of those who say otherwise, an excellent supply of qualified and diverse board candidates are available. “However, we need to continue to make conscious efforts to fill the pipeline,” Ms. Lenkov said. “This begins at the earliest ages with education and continues on through early career options and choices. Diverse employees (actually everyone) needs to think about their careers as limitless. They need to work towards positions at the highest levels and they must gain operating experience whenever and as often as possible.”
3. The Matchmaking Process
Perhaps most important is the process by which board directors are recruited. Recent research shows in 70 percent of the cases a director role is filled by using a personal network or word of mouth. “This means that most often finding a new director goes like this: The board, CEO and trusted advisors discuss whom they might know for a director opening at the company,” Ms. Lenkov said. “Hopefully qualifications enter the discussion. Oftentimes the main qualification is that this new person is known by someone from within the company’s circle of trust.” This process is neither objective nor strategic, said Ms. Lenkov. It is reactive, clearly biased and will yield a sub-optimal result.
The rest of the time an executive search firm is engaged. Although this is an improvement over the hit-or-miss nature of the first approach, it is not foolproof. “All search firms are not created equal and this is particularly true with respect to diversity,” said Ms. Lenkov. “It is one thing to jump on the issue today as it is clearly a hot topic, but boards are where they are because of the mistakes of the past. Identifying, evaluating and recruiting a director is hard and important work.”
It is always safer to put forward someone who has already done it somewhere else. “But it is incumbent on us professionals to challenge ourselves and to look outside of the usual suspects,” said Ms. Lenkov. “If boards are to improve their diversity we must be more diligent and accountable and proactive. Status quo is simply not good enough anymore.”
“Diversity in the boardroom is important because boards need to be challenged in their thinking, their decision making, and continue to evolve and grow as stewards and leaders,” said Becky Heidesch, founder of WSS Executive Search, a women and diversity owned executive search firm. “You cannot have growth and innovation in any capacity if everyone thinks the same way.”
So what gets in the way of building a diverse board? There can be a misconception that there is a lack of qualified diverse candidates. “Usually this is false,” Ms. Lenkov said. “While diverse candidates may not always be conspicuous, with some diligence and intention they can be identified and recruited. When companies rely on their own networks for new board candidates, they will likely end up with individuals much like themselves,” she said. “To build a diverse board requires a strategic and intentional effort to go beyond the usual suspects.”
“I think that in order for corporations to remain relevant in an increasingly competitive world, directors cannot ignore the crucial role that diversity plays in governance, particularly in the boardroom,” said Eral Burks, CEO of Minority Executive Search. “Companies that fail to source talent from the growing talent pool of diverse, well-educated and ambitious individuals run the risk of limiting value creation, compromising sustainability and undermining their longterm competitiveness,” he said. “This is an advantage for companies that recognize the importance of embracing a board diversity. CEOs often say “we want our employees to represent what our customers look like” So why not at the board level?”
Contributed by Scott A. Scanlon, Editor-in-Chief, Hunt Scanlon Media