Board Diversity: Why It's More Important Than Ever
Now that Nasdaq requires boards to include diverse members, companies will benefit from a multitude of experiences and perspectives.
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There has been much discussion about the new Nasdaq Board Diversity Rule, which was approved by the Securities and Exchange Commission (SEC) in early August 2021. The rule requires that Nasdaq-listed companies have at least two diverse board members, or companies must explain why they can't meet the requirement. It's likely that many other public companies will adopt similar measures, particularly since consumers and shareholders are increasingly interested in organizations' overall diversity, as well as how leadership and boards are handling diversity, equity and inclusion (DEI).
Considering how the board's role is evolving as the world continues to change rapidly, it's a good idea for companies to get ahead of the curve and look at their boards' membership now, and make changes that show they have a real commitment to diversity, equity and inclusion.
The board's evolving role
A board of directors is elected by a company's shareholders and is responsible for representing the shareholders' financial interests. A board also traditionally provides oversight of company governance, including policies for the company's management, and the overall company operations. They also usually lead the process of hiring CEOs and other top leadership.
The pandemic has caused massive disruption in everything from business models to consumer behavior to employee expectations. As the pandemic eases, the volatile, uncertain, complex and ambiguous (VUCA) business environment is the new norm. Businesses in the 21st century are global, complex and experiencing a cultural evolution. Consumer behavior is evolving, and the future of work looks very different from the past.
As a result, companies and their boards are examining every part of their businesses, including their operating model; how to foster corporate resilience and sustainability; and people-related priorities such as reskilling, increased business digitization, wellness and their commitment to DEI.
In the past few years, we also saw many societal issues, in addition to the pandemic and public-health crisis, that have affected the role of the board in looking at DEI issues. Many companies were called on to take a stand (by their employees, as well as customers and other external entities) as a visible sign of support for sustainability and DEI efforts.
And during the Covid-19 pandemic, research shows that companies with diverse boards were better prepared to succeed against all odds, according to a July 2021 report by BoardReady, a Seattle-based nonprofit that helps companies with board diversity. "No matter whether you're looking at racial diversity, gender diversity, or diversity in age, companies with a broader range of perspectives at the board table did better," said the report's lead researcher, Rajalakshmi Subramanian.
As the world changes, so too must boards
As the world and economy continue to change, so too must boards and overall corporate governance. With the world changing at a faster pace, and the need for different kinds of board expertise due to an evolving workplace and workforce, there's never been a better time to think about your board.
A diverse board can be a competitive advantage and make a company stronger over time. There are additional benefits, including more diverse knowledge and viewpoints, a more inclusive company culture, a broader view of risk management, and an enhanced brand and business reputation by aligning a company's values with their actions.
According to a report from Russell Reynolds Associates, "Diversity for its own sake falls short of both the need and the opportunity. An evolution is underway, and boards now are beginning to realize that it is the breadth of perspective, not the mere inclusion of various diverse traits, that benefits the organization."
In today's world, when companies endeavor to have their employees mirror the diversity of their stakeholders and consumers, a multi-faceted view of diversity that includes a breadth of perspective should be the goal. In other words, no more diversity "tokenism" — consider all dimensions of diversity including race, gender, sexual orientation, depth and breadth of professional and life experiences, and ethnic background.
Research supports more diverse boards overall. "Our expanded 2019 data set shows that companies whose boards are in the top quartile of gender diversity are 28% more likely than their peers to outperform financially," noted a recent McKinsey & Company report.
There are significant costs to not taking action. A company without diverse management will appear increasingly out of touch with consumers' beliefs and behaviors. It can face issues with everything from attracting talent to selling products, as employees look for a company that reflects their values and consumers show a preference for companies that stand up for broader societal issues.
It's time for companies to take a visible and public stance and appoint board members that reflect today's world.