Earlier this month, Dr. Erika James, Dean of the University of Pennsylvania’s Wharton Business School, was elected to Morgan Stanley’s board of directors. James, a Black woman, will be a welcome addition to the bank’s board, which as of 2020, was 71% male and 79% white.
According to the bank’s 2020 Diversity & Inclusion report, its board of directors is “actively involved in diversity and inclusion efforts” across the company. The board, alongside CEO James Gorman, is “responsible for shaping strategies to improve representation, support the retention and advancement of underrepresented employees, and drive inclusion and belonging.”
These are lofty goals, and they’re increasingly top of mind for boards across the country, as well as for the professors Dean James oversees at Wharton. “It’s amazing how much governance has changed,” Wharton finance professor Luke Taylor noted during a November panel discussion called “Redefining Corporate Governance,” part of Wharton’s “Beyond Business” lecture series. James moderated the panel, which also featured Wharton alumnus and Diligent Corporation CEO Brian Stafford and Wharton management professor Mary-Hunter McDonnell.
Today, shareholders care about more than just profits; they care about treating employees well, and taking care of the environment, Taylor said. “You can imagine cases where shareholders say, ‘look, I’m willing to sacrifice some of our profits in order to do the right thing for society or the right thing for the environment.’”
How diverse boards win
More diverse boards achieve superior return on sales and ROI, and experience lower stock price volatility and fewer incidents of bribery and fraud, McDonnell said. “And there’s a number of studies that suggest that, in general, more diverse boards are better ESG performers.” This is why so many institutional investors have been vocal advocates of board diversity, she added.
“The boards that have had the biggest impact on culture are the ones where each board member brings their own unique experiences and background,” Stafford said. “That’s just a huge asset; it’s easier to suss out a cultural issue, and it’s easier to figure out where to make a change, and it’s easier to get exposure to incredibly talented people, and hopefully keep and retain your talented people who might not look exactly like the CEO, but might look like someone on your board.”
Because of a lack of diversity, both in lived experience and in expertise, “many boards are not equipped to offer strategic guidance on these kinds of nonmarket crises that arguably carry the most enterprise risk for firms today,” McDonnell said. In turn, companies have adjusted the profiles of their new board appointees, with an eye towards people who can help lead through “turbulent social and political environments.”
Diversity improves the quality and accuracy of decision-making in any meeting, but particularly in a boardroom.
“The idea is, if everyone on a team has a similar background to you, you’ll assume everybody understands the issues similar to how you do, and you assume it’ll be easy to sell your point of view,” McDonnell said. But, in a room where everyone brings different backgrounds, “you might have to do some convincing.”
“People might see the situation differently, so you prepare more before the meeting and deliberate more during the meeting. And because of that deeper deliberation, factual inaccuracies are more likely to surface, and potential pitfalls are more likely to be discussed.”
All told, a diverse board creates smarter decision-making because it creates a diversity of thought. “You’re making the board prepare harder and deliberate harder.”
“Just about every board out there is having a conversation about diversity,” Stafford said. “More and more millennial employees are asking, ‘Why does our board not look like our team?’ Or, ‘why does our board not look like our customer base?’ And I think it’s pretty difficult for a board to argue why its makeup shouldn’t be more representative of either the people who work there, or your customer base.”
Imperatives for board hopefuls
McDonnell outlined three goals for women and people of color, who are systemically underrepresented in boardrooms, aspiring towards board membership.
The first: understand the problems a company is facing, and strengthen your skills that speak to those emerging issues and areas of enterprise risk.
The second: be visible. Claim your expertise and establish yourself as a thought leader in that space with tools like LinkedIn and other social media.
The third: be proactive. Attaining that first board seat, McDonnell has found, often takes a year or two of thoughtful network cultivation and strengthening your expertise “in order to position yourself so that you’re in the right place at the right moment when a board is looking for a skill you have.”
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