The diversity of corporate boards is not progressing quickly. Companies need to examine their methods, measurement and motivation as they work on this imporatant issue.
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Creating more diversity on boards is an important goal, yet companies are struggling to make progress. Patricia Lenkov, Founder and President of Agility Executive Search and author of Time's Up: Why Boards Need to Get Diverse Now, goes deeper in this interview into the how and why increased minority representation is critical now.
Women and minorities are still relegated to a small subset of board seats set aside for underrepresented groups. You've noted in the recent Spencer Stuart report that this means that if representation of one underrepresented group rises another minority group's representation falls (as happened this year with Asian board members). How can boards expand their thinking about diversity?
Lenkov: Board must appreciate the value that diversity can bring rather than view it as a compliance exercise. We should also eradicate the myth that there are not enough qualified candidates to fill board seats. For almost any set of qualifications there are in fact a multitude of candidates who can bring the requisite skill set and experience and are diverse in terms of gender and/or race/ethnicity. To improve diversity, we have to diversify the way we look for board candidates!
Another statistic from the research showed while the number of women directors has risen from 28% to 30%, the overall number of new women board members fell from 47% to 43% from 2020 to 2021. How do companies and boards know what to measure in terms of moving diversity forward?
Lenkov: The fact that it is almost 2022 and we are still measuring these changes on such a granular level is troubling. Rather than focus on a few percentage points up or down, companies would be better served to appreciate that their businesses are ever-changing, the business environment is evolving by the second, and keeping boards stagnant and unchanging does not serve the company well. Boards and the companies they serve should be focused on continuous improvement. As strategy, business conditions, challenges and employee expectations change, the board should transform accordingly. This does not mean endless board turnover but rather regular assessment of the contributions and composition of boards and the freedom to adjust as necessary.
While a close eye is kept on companies in the S&P 500, what about companies not on that list? What progress have medium and small businesses made on board diversity?
Lenkov: We can look at the rates of gender diversity in the S&P 500 versus the Russell 3000 to get a sense of progress or the lack thereof. In 2021 women made up 29.1% of board directors in the S&P 500 and in the Russell 3000 this number was 24.1%. Generally, the larger the company the more progress it has made with regards to diversity.
Another insight can be gained by the fact that in 2021, 78% of newly elected directors were white in the S&P 500, as well as the Russell 3000 and the S&P Midcap 400.
Are certain industries better at board diversity than others? What about geographic areas?
Lenkov: Not surprisingly consumer companies have the most gender diversity on their boards. Industrial and energy companies have the least. The difference between both ends of the spectrum is not huge going from 29.1% at the high end to 23.8% at the bottom. Regarding ethnic/racial diversity, it has been reported that utility boards have the most diversity while energy and real estate have the least.
As it pertains to geography, diversity and the lack thereof has been more or less evenly distributed across the country. However, now that California and Washington have a board diversity quota, we would expect to see diversity numbers increase. Colorado, Pennsylvania and Ohio have non-binding diversity requirements that ask but don't tell boards to improve diversity. This too will have impact and improve diversity in these geographies.
Is there a particular aspect of diversity that seems to be easier to achieve, for example, gender diversity or racial diversity? What role is intersectionality playing?
Lenkov: The ability to achieve a particular aspect of diversity will depend on what other criteria a board is looking for. There are a finite number of racially/ethnically diverse CEOs and even female CEOs are still scarce. For example, as of June of this year there were only 4 Black/African American CEOs of Fortune 500 companies. So, if a board if fixated on a Black/African American CEO of a Fortune 500 company, they are likely to come up short-handed as these four individuals are already spoken for. On the other hand, if a board is looking for a CFO or perhaps a head of technology (Chief Information Officer or Chief Technology Officer) there will be an embarrassment of riches. There are super qualified candidates in abundance and amazingly many are ready, willing and able and not yet approached.
At the end of the day, with diversity we are ultimately looking for diversity of thought. As such, intersectionality provides an added bonus of multiple layers of diversity and this will further enrich their ability to contribute.
Many boards are encouraging turnover or adding seats to allow for openings to be filled by new candidates. Are these strategies working to increase board diversity?
Lenkov: Board refreshment (turnover) and adding new seats are certainly ways to improve diversity. In the 2021 proxy year S&P 500 companies added 456 new directors, which is the most since 2004 according to the Spencer Stuart Board Index. However, directors with long tenures are still commonplace. In fact, in the United States that are over 1,000 directors on public company boards who have a tenure of 25 years or more. If boards are to evolve and make progress, expectations about tenure and turnover need to change.
Pressure to report to investors, positive business outcomes and more creative future planning have been part of making the case for diversity. What seems to be the most powerful motivation for increasing representation?
Lenkov: The most powerful motivation for increasing representation should be an appreciation for the value that diversity can bring. It has been shown that diverse groups deliberate more when making decisions as they must consider divergent points of view. However once decisions are reached, they tend to be superior to those that come from more homogeneous groups. This should be motivation enough, however investors are increasingly measuring diversity and it is ever more important to employees well. There is an expression "you cannot be what you cannot see" and to attract the best employee's companies must be mindful of how they present themselves including the values they portray though their board composition.
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