3 factors that are organically driving board diversity
The calls to diversify board leadership are justified for many reasons. First, it’s about time corporate leadership started looking like the rest of the employee base and the customers they serve. Second, diverse leadership can have a positive, cascading effect on inclusion and company culture. It has also proven to lead to better decision-making and more profitability.
The value companies are seeing from board diversity is not merely from the presence of a woman or person of color. Today’s newest board members bring different skill sets and commit more time to the job. More than any regulations, these needs are going to help improve representation on corporate boards in the years to come.
Friso van der Oord, senior vice president at the National Association for Corporate Directors, told Fortune that board turnover has gone up lately and he expects it to increase due the urgent need for board members with more free time and wider-ranging skills.
“Directorship has become an actual job, it’s not an entitlement you receive after an illustrious career in the c-suite,” van der Oord said. “It’s a hard job.”
Boards are primarily concerned with risk mitigation and the long-term strategy of the company. The risks and opportunities brought on by automation, the ongoing pandemic, The Great Resignation, digital transformation, remote work, and the public outcry for action against injustice now require greater specialization than ever.
“The level of complexity has continued to increase, and the amount of time has also gone up,” Janet Foutty, executive chair of the US Deloitte board, told Fortune.
As a result, leaders with technology, HR, and legal backgrounds are seeing greater interest as board candidates, Belen Gomez, vice president at Equilar, previously told Fortune.
The emergence of ESG has also come through in recent board appointments, van der Oord shared. NACD analysis of MyLogIQ data found that the presence of board members with ESG backgrounds has doubled since 2018, from 6% to 12%, and HR or human capital nearly has as well, growing from 6% to 11% in their presence on boards. Those with technology expertise increased from 34% to 43%.
This push is meant to improve the effectiveness of boards but should also help diversify them.
“Historically we’ve looked only for CEOs and CFOs, and those roles are filled, largely historically by a white man,” Patricia Lenkov, an executive search and governance advisor, told Fortune. Lenkov, who has been part of thousands of board searches, said that the evolution away from boards that were mostly white, male CEOs and CFOs was occurring slowly over the last two decades, but has accelerated as of late. This has occurred for three reasons:
1. Greater scrutiny
Board composition and decision-making has seen increased attention from media and regulatory agencies as well as institutional investors and shareholders. Ratings services are tracking more detailed information about governance, and ethical transgressions are more likely to be a red flag today, with individual board members more likely to be held accountable.
Additionally, the public push for corporations to do better has heightened attention around diversity, sustainability, and social responsibility strategies. Boards are now tasked with steering their organizations through uncertain, unprecedented times and need new perspectives to develop long-term strategies around these topics.
The growing expectation is that reporting requirements around company diversity are going to become more detailed, standardized, and widespread. A few states and Nasdaq have already set diversity standards for boards, and plenty of top employers are publicly sharing diversity and CSR reports. The SEC has also started asking for “human capital disclosures,” with agency leadership under the Biden administration advocating for the requirements to be stronger.
Companies truly interested in change will be tying these metrics to executive compensation.
“You can start to put that in compensation plans, likely long-term, because diversity is going to be solved with the long-term versus the short-term, one-year plan for management,” Maria Moats, governance insights center leader at PwC US, told Fortune.
2. Greater time commitment amid change and uncertainty
Not too long ago, a major corporate CEO “could be sitting on two or three or even sometimes four outside boards. Today you don’t ever see that,” Lenkov said. “When shareholders are voting on boards of directors, and they see a CEO sitting on too many boards, they all have pressure to vote against that person.”
NACD research estimates that the time commitment for full board service has doubled since the pandemic broke, van der Oord shared, with most of that coming from having more meetings and also more time on director education. Moats adds that board members need more time to handle and react to the changing regulatory environment and also to spend more time collecting feedback from company stakeholders.
Companies are also asking board members to leave, opening the door for new leaders who were likely not on boards before. Strong candidates could strengthen their candidacy if they aren’t already on a board, because they’ll have more time to give. This opens the door a bit wider for a more diverse candidate pool.
3. Greater skill sets needed at the top
With more scrutiny around diversity, human capital, sustainability, and social impact data, corporations will be looking for leaders who can move the dial on their key metrics. This means HR leaders, generals counsel, technology leaders, sales and marketing executives, and even subject-matter experts can be viable candidates for board positions.
Having experts available to provide real-time, rapid feedback on important decisions around technology, workforce deployment, or supply chain sustainability can make a huge difference.
“Given the pace of change around them,” van der Oord explained, “the speed of learning on a board is a competitive edge that these individuals need to stay relevant.”
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