A lack of board diversity is blocking genuine transformation

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