Does Diversity in the Boardroom Matter?

While driving gender and ethnic diversity among directorship roles has gained traction at large, consumer-facing companies, movement has lagged across corporate America as a whole. Yet a growing body of research suggests boosting diversity in your boardroom is worth considering.

If you’re the CEO of a consumer products company, it’s not hard to make a case for diversity. After all, the market you’re after is more heterogeneous than ever, so strategically it makes sense to have an executive team and a board that reflects that mix of cultures, genders and ethnicities.

But what if you head up an industrial B2B company? Does pursuing a more diverse board do anything more than show the world you’re keeping up with 21st century social trends? Given how few sitting CEOs are women and minorities, does this mean you should abandon a long-standing strategy of seeking out experienced CEOs to serve as directors? In principle, you might agree with the value of a diverse culture. But in practice, does it make sense for your business?

“The role and responsibility of the board is to the shareholder, and the shareholder doesn’t care about diversity,” says Paula Cholmondeley, CEO of The Sorrel Group, a director education consultancy. “They want the best ‘team’ that can deliver and enhance the value of the organization.” Cholmondeley would know; she has served on eight corporate boards and on just about every committee, as well as held senior financial and strategy positions at a variety of large companies, including Owens Corning, The Faxon Company, Blue Cross of Greater Philadelphia and Westinghouse Elevator Company.

In her view, diversity isn’t something you seek because you want the positive PR or because it’s the nice thing to do, but rather, because you want to fill out the mix of skills the company needs in the boardroom to succeed in its mission.

“The fallacy that has, I think, turned into a belief and is wrong is that the only team or the best team to produce results is a team of CEOs,” she says. “But companies don’t run based on teams of CEOs, and a CEO doesn’t surround himself with duplicates of himself. Every corporation that excels at anything is structured to bring a multiplicity of topical skills to the team.”

Boards, too, need a multiplicity of skills. Regardless of the type of company or the industry in which it operates, a lack of diversity in the boardroom—based on gender, ethnicity, age, background, nationality, etc.—could hurt, even if everyone sitting around the table is a CEO. “The stronger boards are composed of a mixture of CEOs and of people with senior functional skills, which will vary based on the company and the industry,” says Cholmondeley, noting that contrary to long-held tradition, previous board experience shouldn’t necessarily be a prerequisite. “Once you say you want a senior functional skill, you’re not talking about the CEO.”

While many companies have embraced this point of view, others feel that they can’t afford to prioritize diversity in the boardroom and/or question the business case for doing so. Yet a growing body of research suggests that diversity at the top correlates with greater innovation and success. A global study by McKinsey & Co. found that returns on equity for companies ranking in the top quartile of executive-board diversity were 53% higher, on average, than they were for those in the bottom quartile. EBIT margins at the more diverse companies were also 14% higher, on average, than those of the least diverse companies.

Another study by the Center for Talent Innovation found that employees at companies with more diverse leadership were 45% more likely to report that their firm’s market share grew over the previous year and 70% more likely to report that the firm captured a new market. And consensus around the sentiment that boardroom diversity matters is building among business leaders. In the 2016 update of its governance principles, the Business Roundtable strongly endorsed a link between racial and ethnic diversity in boards and board effectiveness and the creation of long-term shareholder value.

Given the growing body of evidence, few companies, even B2B, industrial, non-consumer-facing manufacturers, can afford to ignore the growing diversity of workforce and consumer populations, asserts Idalene Kesner, dean of Kelley School of Business at Indiana University, who spent many years researching board diversity in the ’80s and ’90s.

“I would say there are very few industries today that aren’t touched by the need to be responsive to our diverse population,” says Kesner, who sits on the board of Berry Plastics, a global manufacturer of packing solutions. “One of the things Berry does is design containers. If you can imagine, at the most mundane level, a container that fits a woman’s hand or a container that’s more appealing to various diverse groups—that definitely has sales implications to it.”

Ronald C. Parker, president and CEO of The Executive Leadership Council, agrees, adding that the customers of B2B companies are looking for diversity in their vendors. “They’re now insisting that the reps who call on them look like the population they serve.”

Companies like DuPont, MasterCard, Coca-Cola, Ford, P&G and The Walt Disney Company have all taken steps to actively engage diverse suppliers. As DuPont pledges as part of its formal commitment to maintaining a diverse supply chain: “Ensuring our supply base reflects our customers, employees and the communities where we live and work is a key business strategy.”

Making it Happen
Despite this building momentum, progress on moving the needle with boardroom diversity has been sluggish. According to a study by Deloitte and the Alliance for Board Diversity, women and minorities held 30.8% of Fortune 500 boards seats in 2016—up from just over 25% of board seats in 2012. When compared with the exclusively male, all-white boards that once held the lion’s share of boardrooms in Corporate America, that’s a significant change. But compared with the fast pace of changing demographics in the U.S.—and noting the fact that women make up over half of the consumer population—some argue women and minorities are still significantly underrepresented.

“When you look at the progress of women on boards over the long haul, the index looks impressive and you can say, ‘Yes, we are making progress,’” says Deb Henretta, former global president of e-business at Procter & Gamble and current senior advisor at management consulting firm SSA. “But if you look at the compound annual growth rate that you see each year, it looks less exciting. And when you look at the last couple of years, it’s stagnant.”

Kesner agrees. “To be honest, I’ve been surprised that progress has been much slower than what I would have predicted years ago,” she says.

While there has been some movement for African-American women, who gained 19 seats since 2012, the increase in the number of board seats held by African-American men over the same four-year period was nearly flat, with just three seats added, says the Executive Leadership Council’s Parker.

“Collectively, looking at women and minorities, we are at an all-time high, but when you consider our collective spending power of about $4 trillion, when you look at Latinos, Asians, women and blacks, to have that few board seats represented is really disappointing,” he notes.

Why the disconnect? Experts point to five roadblocks hampering movement toward more gender and ethnically diverse corporate boards—and offer solutions to CEOs and chairmen seeking change about what can be done to break them down.

1) Problem: Lack of Buy-in. A PwC survey of 2,300 directors from 46 different countries found that when asked the question, “Do you believe that diversity on your board enhances company performance?” only 24% of men said yes, compared with 89% of women. That isn’t necessarily because men are discounting women, says Coco Brown, CEO and founder of Athena Alliance, a nonprofit that helps small and midsize companies find female executives to fill board seats.

In fact, Brown says she has received overwhelmingly positive feedback and support from male individuals at prospective corporate clients. But, perhaps not surprisingly, male directors are not as likely to be aware of the positive correlation, and they may not want to fix something they don’t perceive as broken. “They may not be tuned in as well as women are about the benefits of diversity. They may not be paying attention to it.”

Solution: Look at the numbers. Proponents of diversity at the boardroom level and beyond say the goal isn’t to achieve parity for its own sake, but rather to grow U.S. advantage in an increasingly competitive global market. As mentioned earlier in this article, an expanding body of data suggests a strong correlation between such diversity and a better bottom line. Catalyst, for example, found that companies with the most women board directors outperformed those with the least on both return on sales (by 16%) and return on invested capital (by 26%).

In the aforementioned update to its Principles of Corporate Governance to reflect the connection between diversity and performance, the Business Roundtable acknowledged such findings, asserting: “Diverse backgrounds and experiences on corporate boards, including those of directors who represent the broad range of society, strengthen board performance and promote the creation of long-term shareholder value.” The newly updated principles encourage boards to “develop a framework for identifying appropriately diverse candidates that allows the nominating/corporate governance committee to consider women, minorities and others with diverse backgrounds as candidates for each open board seat.”

2) Problem: Lack of Qualified Candidates. Solution: In fact, experts say, the notion that qualified female and ethnic/racial minority candidates for board positions can’t be found is simply a persistent myth. “Sometimes I will talk with people who want to get women on their board and they’ll say, ‘I can’t find them.’ And I don’t mean to be disrespectful here, but my answer is, ‘Look harder.’ There are a lot of women out there in C-suite and other leadership positions,” says Henretta.

One of the problems is that when a board seat opens up, sitting directors are often called on to put forward potential candidates, which leads to a vicious cycle. “Men are leveraging their networks,” says Brown. “So what I run into over and over again is not, ‘I love my old boys’ club and I want to keep the women out.’ What I hear is, ‘Honestly, Coco, I don’t know women.’ From a business/professional perspective, they leverage their executive networks, and those are still mostly men.”

Margot McShane of Russell Reynolds says that more boards are beginning to recognize that they have to go outside their comfort zone to deliberately seek out a diverse slate of candidates rather than relying on their own limited Rolodexes.

“The days of just networking at a board level seem to have passed for the more sophisticated clients,” she says. Those that put women on nominating and governance committees may have an edge because “women know women,” says Henretta, who, together with Kim Whitler at the Darden School of Business at the University of Virginia, has just completed research looking at not only women on boards, but specifically the small numbers of women on what she calls the “power committees,” such as nom/gov, compensation and audit.

3) Problem: Bias Toward Sitting or Retired CEOs. Solution: As noted earlier, many boards are still, as they have been for decades, more inclined to seek either sitting CEOs or retired CEOs who have experience on boards and are ready to tackle governance issues from day one. But that predilection may blind boards to other, better options given how few CEOs today are women and people of color. “If you start with that as the criteria, right away you have a problem,” says Miguel Quiñones, management professor at the Cox School of Business at Southern Methodist University and director of the school’s Latino Leadership Initiative. The traditional pipeline for CEOs and chairmen is not as robust as it could be, he says. “So you have to ask yourself, is that really the most important criterion today?”

Increasingly, companies are recognizing that the skills they need to fill out board expertise go beyond what retired CEOs might be able to contribute. According to the Spencer Stuart 2016 Board Index, only 19% of new independent directors at S&P 500 companies are active CEOs, chairs, presidents and COOs, compared with 49% in 1998.

Boards are prioritizing specificity of skills vs. a high-profile CEO role. “The ultimate responsibility of the board is to skate where the puck is going,” says Steve Klemash, Ernst & Young partner and director of EY’s Center for Board Matters.

The complex challenges companies face today are leading boards to seek specific finance, digital, cybersecurity, marketing, social media and global experience. That’s where executives lower down in the organization can represent some low hanging fruit, he notes. “There are plenty of quality women and ethnic minorities who have been coming up the ranks who have benefitted from more open-minded organizations. There are plenty of SVPs who have varied skillsets. The only one they’re really missing is that first board, but you can coach them up.”

“Governance is a teachable skill,” agrees Cholmondeley. “I can teach somebody to be a board member. But I can’t teach somebody cyber. I can’t teach them the depth of the 10, 20 or even five years of functional expertise they need to bring. So instead of worrying about whether a person has been on a board before, they ought to be looking at, does this person bring the emerging functional skillset that we need?”

Given all the liability issues for directors today, boards may also be skittish about uncharted territory, says Brown. “It’s really challenging to ask boards to start using a process today that they haven’t used before.” But a host of talent firms and universities now offer robust governance training to help ready new directors for board service.

4) Problem: Difficulty Attracting Top Candidates. “The companies that have that challenge are the small to mid-cap public companies and private companies,” says Brown. “They just aren’t known.”

Solution: Those that lack both the marquee brand name and the budget to do a pricey search still have options. First, be willing to reach down further into successful company ranks to find up-and-comers who have not had board experience, but who have expertise specific to your industry or near-term expansion goals. Look to successful entrepreneurs or CEOs of private companies, who can also offer valuable insight and expertise, particularly related to rapid growth. Tap the networks of organizations such as Athena Alliance, Catalyst and the Executive Leadership Council, among others.

5) Problem: Slow Turnover. With no tenure limits, and the average director term at roughly 10 years, board positions for independent directors simply don’t come open up that often. Last year, the number of new independent directors declined slightly, to 345 from 376 in 2015, according to Spencer Stuart’s annual study. Even when a board member has finished serving a term, the company may see a greater advantage to retention than trying to get someone new up to speed. At theBoardlist, a Silicon Valley talent marketplace designed to match highly qualified women candidates with tech board opportunities, a dearth of open seats has been a barrier.

“Business leaders have been incredibly receptive to the message,” says Lesley Grossblatt, COO of theBoardlist. “They say, ‘That’s fantastic, but unfortunately, no one is leaving our board.’”

Solution: Consider adding a board member. It may not work for every company, but for those whose directors are already swamped with unfinished tasks, it’s a good time to start thinking outside the box, says Klemash. “There isn’t an audit committee chair out there who wouldn’t say he or she is overwhelmed.” Given that, there may be an opportunity to solve several challenges simultaneously by adding a director seat and filling it with a minority or female candidate.

To be sure, U.S. company boardrooms are less diverse than those in Norway, Sweden, France and others that have legislated diversity ratios. But there is clear movement toward achieving parity. “I don’t have a crystal ball,” says Mel Lagomasino, CEO and managing partner of the financial advisory firm she founded, WE Family Offices, and a board member at both Coca-Cola and Disney. “But I do think one of the really good things out there is millennials and how they think.”

Gen-Y prioritizes family and work-life balance more than the previous generation, she says, which may lead to changes that enable women to achieve the same rates of ascension in corporate America as their male counterparts have. “As they start to come on boards, I think they’ll have a positive influence on the future of companies. So I kick the ball forward to the next generation of leaders.”

Read more: PENN MUTUAL: Diversity-Driven Success