A lack of board diversity is blocking genuine transformation
As boardrooms discuss an issue creeping up their priority list – the readiness of their company to digitally transform – they should begin by raising a mirror on their own diversity
Diversity has catapulted up the boardroom agenda as companies have come under growing pressure to better reflect the diversity of their customer bases and wider communities in their leadership structures. It is simultaneously colliding with another issue that is redefining business success across all industries: digital transformation.
A viewpoint that started as an educated guess is now validated in a number of leading studies: organisations with more diverse boards and leaders perform better. When it comes to an initiative as critical as digital transformation it can be the difference between success and failure.
Analysis by McKinsey found that companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than those in the fourth quartile. The finding was even more profound when examining ethnic diversity, where top-quartile companies outperformed bottom-quartile companies by 36% in profitability. The greater the representation, McKinsey found, the higher the likelihood of outperformance.
“That shouldn’t be so surprising,” says Dottie Schindlinger, executive director of the Diligent Institute, which produces original research and analysis that amplifies the voices of diverse corporate leaders and shares insights on modern governance practices. “If everybody on the board looks and thinks alike, they’re likely to be pretty myopic and miss crucial areas of opportunity or risk.”
It’s important to recognise that diversity isn’t only defined by physical attributes like gender or ethnicity, but also experiential attributes like education and skill sets. When boards are only made up of former CEOs, CFOs and COOs, as has traditionally been the case, the diversity of their combined knowledge and expertise is limited and they are less likely to be suitably informed on modern issues critical to business success such as digitisation and cybersecurity.
A recent report on skill set diversity by the Diligent Institute found that while the number of traditional board candidates with CEO, CFO and COO expertise is declining globally, the decline is very slow. It noted only a small percentage of board members with, for example, ESG (environmental, social and corporate governance) expertise, despite its growing importance to businesses. Board members with technology expertise are slightly more prevalent, but still nowhere near the levels relative to the risk of cyber and digital disruption.
“If you’re not a digital-first company, you’re probably not doing so well during this pandemic, so we would expect the numbers to be much greater, but still two thirds of board hires are people with CEO, CFO and COO expertise,” says Schindlinger. “Companies are starting to realise they need to have other voices at the table, with different expertise and ways of seeing the world, and that’s really going to be the only way to succeed with transformation, but progress is slow.”
Transparency and reporting are crucial to accelerating diversity progress. In the US, companies with 100 or more employees are asked to file an EEO-1 form to the Equal Employment Office (EEO) each year. The EEO mandates them to provide, in aggregate (omitting any personally identifiable information), demographic workforce data including gender and ethnicity. Discussions among regulators indicate a similar spotlight could soon be shone on boardrooms.
In the UK, the Financial Conduct Authority (FCA) has revealed new proposals to mandate public companies with fewer than two female directors out of five to justify this to investors in an annual statement. The FCA wants at least one of the posts of chair, CEO, finance director or senior independent director to be held by a woman, while further changes would require companies to have at least one director from an ethnic minority background.
“The benefits of disclosure are hard to argue against. We need to start to really look at why barriers exist, and try to find a way to collect information in a safe, anonymous way that is compliant to local data regulations. A solution could be for individuals to volunteer information about themselves and for that information to all be kept in aggregate,” says Schindlinger. “Measurement is key. You can’t know how much progress is required until you can actually see what the current situation is, so some level of safe disclosure will help show how far we have yet to go and how things are trending.”
As companies increasingly wake up to the powers of a more diverse board, it is likely to play an even greater role in separating the winners and losers of digital transformation and business in general. To make it easier for boards to bring diversity into their leadership structure, Diligent, a leading governance risk and compliance (GRC) software-as-a-service company, has launched the Modern Leadership Initiative, a large database of current board members and rising directors. The freely accessible database allows companies to post open board seats and gives people the opportunity to find them while volunteering whatever information about themselves they wish to share in a safe, diverse space.
In addition, the Compensation and Governance Intel solution from Diligent allows organisations to gain the vital insights needed for modern governance and benchmark board composition against peers, source new candidates and pre-empt opposition from investors through curated, AI-assisted news feeds, insights and industry health analytics.
“You can’t have a board that represents every single interest, but you do need to know what your core business strategy is, who your key stakeholders are and whether your leadership is able to suitably represent their interests and protect the company from undue risk,” Schindlinger adds. “When you bring a new perspective, especially a digital perspective, into the boardroom, magic can happen, because you can see things in a different way. Diversity brings new and fresh ways of seeing the same issues, which ultimately allows companies to flourish in their digital strategy.”
To learn more about how Diligent’s modern governance platform brings together the disparate tools, data and integrations and processes into one place so that leaders can govern at today’s pace of business, visit diligent.com