June 27, 2018 – Diverse boards make better decisions and lead to improved company performance.
Yet despite the research, validation and prodding by institutional investors and state and city government as well as all types of social and non-profit organizations, 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 women 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? Patricia Lenkov, founder of Agility Executive Search 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.
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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.”
Equally important is being able to advocate for oneself and gain exposure within the decision-making circles that count in the boardroom.
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.”
Path to Profitability: The Business Case for Board Diversity
Companies with greater female representation in the boardroom tend to be more profitable, but women still remain under-represented across Asia Pacific boards, with most countries showing little or no progress, according to a study by Korn Ferry and the National University of Singapore Business School’s Center for Governance, Institutions and Organizations.
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.”
Ms. Lenkov is widely regarded as a thought leader on board recruiting, corporate governance, composition and succession. She is well known for her work on board diversity and sits on the New York Steering Committee of 2020 Women on Boards.
Ms. Lenkov recently sat down with Hunt Scanlon Media to discuss the importance of diversity and how companies can create a more inclusive board.
Patricia, why is diversity and inclusion so important to the growth and development of a business?
As we live in and businesses function in a diverse world and marketplace, having such diversity reflected in companies is important and can add meaningful insights to decision-making and strategic planning. 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. This does not mean it is a handout, but rather there are opportunities open to all who are qualified. This is important not only because it is equitable but because it is the hallmark of a true meritocracy.
What can companies do to construct a quality board today?
All boards need to be made up of individuals with different skills and experiences. Every board requires at least a couple of operators, executives who have run businesses in their entirety. Finance expertise is also always required. Above and beyond this, other qualifications and expertise depend on the company, industry, size and stage of the business and strategic plan. The composition of all boards needs to evolve over time as all companies are evolving as well. The board must reflect stakeholders and what is a quality board today may not be the same five years from now. The construction of a quality board requires a proactive strategic process and not simply the selection of those who are most accessible or most willing.
“Companies first need to appreciate the value that a diverse board can bring. It is not simply a social crusade but rather it is good governance and has been shown to yield improved financial results.”
How does diversity of perspective in the boardroom lead to a good dynamic and better results?
Boards make decisions and solve problems. It is well known in decision theory and research that diverse groups take longer to deliberate about a decision but when they finally agree and make a decision it is superior to that which is made by homogenous groups. To over-simplify, if I am from Europe and you are from the U.S., there is so much in our frame of reference and experience that is distinct and uncomparable. This means we will interpret the same information in very different ways. The way we solve problems and analyze information will be inconsistent, and it is precisely this inconsistency that can yield more robust discussions and conclusions.
Fewer Women Fill Seats on Boards, Heidrick & Struggles Study Reveals
For those who have been striving for women to achieve their fair share of seats on corporate boards, a recent Heidrick & Struggles report – ‘Board Diversity at an Impasse?’ – was no doubt disheartening.
Are female directors driving change? What’s stopping women from getting onto boards?
Both male and female directors are driving the change. However, interestingly enough, according to the PWC Annual Corporate Governance Survey, 80 percent of female directors say the pace of diversity on boards is too slow, and only 33 percent of male directors agree. In terms of what is stopping women from getting onto boards, there are several factors. First, there has not been enough demand until recently. Also, some women, and of course some men as well, do not know how to position themselves and make themselves visible in the right places to be identified for board opportunities. In others words, to get on boards we must be able to find you. This should be easier than ever due to social media and the internet. Finally, to the extent that women can assume P&L responsibility or senior finance roles, this improves chances of getting on boards. Other functional skills are important as well but operating and financial expertise is universally required on boards.
What gets in the way of building diverse boards?
There can be a misconception that there is a lack of qualified diverse candidates. Usually this is false. 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. To build a diverse board requires a strategic and intentional effort to go beyond the usual suspects.
What can companies do to make their boards more diverse?
Companies first need to appreciate the value that a diverse board can bring. It is not simply a social crusade but rather a matter of good governance and has been shown to yield improved financial results. Once there is an awareness and appreciation then the identification and recruitment process can begin. Boards should be aware that they need not simply look for diversity for diversity’s sake, but rather they can seek a highly qualified executive who brings a specific and desired skill-set and who also happens to be diverse.
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Will Schatz, Managing Editor – Hunt Scanlon Media