Diversity in the Boardroom: The Numbers Don’t Lie

Leadership

Oct 14

In almost any context the term “diversity” is attached to all kinds of positive connotations. In fact, “embracing diversity” has been a popular concept for quite a while that has permeated its way into many facets of our society and culture, as it should.

It’s interesting, then, that diversity has had a difficult time catching up in one of the biggest drivers of our society and economy, the world of business and specifically the board room.

How can this be? A global survey of 22,000 firms revealed that 60% had no women on their boards, and half had none in C-suite positions. Here in the US, less than 20% of S&P Fortune 500 company boards seats are filled by women, only 8.6% by African Americans and 4.8% by Latinos.

The climate of the business world is directly mirrored in the world of the boardroom. At an increasing rate shareholders are expecting companies, and their boards, to reflect the customers they cater to. Given that women make up approximately 50% of the population, while African Americans make up 12% and Latinos approximately 18%, it would seem that the numbers are definitely off.

This is even more interesting when you consider that our advanced, innovative, cutting-edge business culture doesn’t seem to be acknowledging the other numbers, the ones that show that diversity absolutely effects an organization’s bottom line for the better.

It’s hard to ignore facts, though, especially when they can be measured. As this phenomenon receives more recognition, it’s likely that the current climate will be dramatically shifting in the near future.

It’s not surprising that research about the benefits of a diverse board of directors is mostly based on the bottom line — a company’s financial performance. Before taking a look at those numbers it’s worth taking a look at the other established benefits of diversity in the boardroom.

But First, Defining Diversity

“Diversity” usually brings to mind gender and ethnic diversity, and those are certainly the groups that research represents when it comes to highlighting the benefits of a diverse board. It’s worth noting, though, that diversity in the boardroom can also translate to things like age, geography and world view. The central, and perhaps most important, theme is a broad representation of different skills, areas of expertise and experiences.

Benefits of Diversity in the Boardroom

Better representation of customers

A breadth of background, experience and worldview translates to a better ability for a board to have its finger on the pulse of the customers it effects with its decision making. We are a diverse culture, and more and more the decisions that boards make are being recognized for their impact on customers and the communities they exist in. It makes sense, then, that a diverse board is going to more accurately represent the people it impacts.

Better decision making

Different experiences, skills and areas of expertise mean more robust and varied perspectives. Bringing a group of diverse minds together helps fuel productive and innovative decision making that will drive a company’s strategy toward its goals.

In family run companies, for example, a diverse board of directors can help manage some of the issues that can be potentially divisive and emotionally charged, like executive compensation, dividends, and succession planning.

Being in agreement isn’t always the best way to arrive at the ideal solution. The dynamics at play when differing views and opinions come together to spark growth and initiative has the potential to be very powerful.

Improved reputation

Simply put, the public pays attention to what the companies it’s giving its money to are doing. Companies like Google and Facebook are coming under scrutiny for a lack of diversity represented in their employees and leadership.

On the other hand, companies who are improving their character by diversifying their boards, like Tesla for example, are being hailed as front-runners of change. A diverse board of directors is an opportunity to establish that a company is forward-thinking and to build the respect and trust of the customers it represents.

Better board functioning

Research conducted and reported on by Catalyst specific to gender diversity on boards shows that mixed-gender boards:

● Have fewer instances of fraud, corruption, bribery and shareholder battles.

● Have more effective risk-management practices.

● Have better collection and transparent disclosure of stock price information and fewer financial reporting mistakes.

● Contribute more to charitable funds than companies without gender-inclusive boardroom teams.

Better able to avoid disruption

Change is inevitable. The impact of technology, changing customer climate, unexpected sources of competition and economic uncertainty are all factors that impact companies. An organization will either stay ahead of these changes or will experience disruption.

A diverse representation of expertise and skill on a board will keep a company moving forward and will enable it to pivot and swerve when challenges and change inevitably arise.

Financial Performance…What Do the Numbers Say?

There’s been a significant amount of research done on the impact of diversity on a company’s financial growth, and it’s all consistent: Diversity equals improved financial performance.

Here are a few examples:

●McKinsey’s research shows that a gender diverse board translates to financial performance 15% above the national median, and ethnically diverse boards result in 35% higher financial performance.

●The Peterson Institute for International Economics reports that for “profitable firms a move from no female leaders to 30 percent representation is associated with a 15 percent increase in the net revenue margin.”

●Refinitiv found that companies with a high “diversity and inclusion index” showed better return on equity, better profit margins and higher dividend yields.

While all of the benefits outlined are important, this last one is usually the one that drives the point home as it’s hard to deny numbers.

With all of the reasons to pursue a diverse board to drive a company’s strategy and growth, it seems inevitable that the slow pace of change will begin to pick up. The innovators, the thought leaders, the front-runners of change will be the ones out ahead leading the race.

Are your ready to take your company’s vision to the next level and build a diverse board of dynamic, skilled professionals? Let’s do this.