Over the past two years, my colleagues and I, at Executive Advisory and the University of Chicago, have conducted research that has demonstrated that diversity is a crucial business tool in achieving corporate success. Corporate leaders have reviewed our research positively and, as outlined below, are taking bold actions to create more diverse boards. Investor demand for diverse directors is increasing in 2020. Goldman Sachs exemplified this when CEO, David Solomon, announced that the firm will refuse to take companies public unless they have, at least, one female or non-white board member. Similar commitments were made by BlackRock, Vanguard, RBC, and others.
Diversifying the boardroom can lead to positive fiscal returns and improve the company’s reputation. Directors with a variety of social and professional perspectives facilitate changes in board culture with a potential to boost corporate performance. Katherine W. Phillips, professor at Columbia University, explains that an increase in diversity often comes with cognitive processing, as well as exchange of information and perceptions of conflict. Similarly, Credit Suisse reports that companies with more women at the board, or at a top management level, exhibit higher returns in equity, higher valuations and higher payout ratios.
These promising impacts on board culture and capital returns motivate investors to pursue boards that prioritize diversity, while still ensuring that the skills and expertise are pivotal criteria in their recruiting process. Boards serve the corporation as its agent and make decisions in an unbiased service of the company and its shareholders’ best interests. With shareholders looking for diversity, board selection ought to consider the areas to which the board is lacking. These areas may include gender, age, culture and ethnicity, as well as professional backgrounds and specific industry expertise. Boards that strive for these types of diversity develop robust perspectives that lead to better risk management and strategy planning.
Board members are in tune with the interests of the groups they represent. A more diverse board means greater attention to internal issues and market trends, and less risk of a PR disaster. Diverse boards drive good business choices because of the increase in insight and momentum that comes with multiple perspectives. This leads to greater market share and more innovative services and products for these companies. Investors and customers are looking for companies that care about social responsibility, have good reputations, and diverse employees. Ideally, companies should be managed with their investors’ and the public’s well-being in mind rather than the chairman’s.
As with social and economic significance of board diversity becomes more widely recognized, state legislatures have taken initiatives to ensure an increase in diversity among public companies. In 2018, California released a law setting a minimum for the number of women required on public boards. Following in 2019, Illinois released a law requiring public companies to annually file public disclosures regarding the diversity of their boards. Companies should not be view initiatives to increase diversity only as a means to achieve a quota. Rather, they should recognize the positive social and financial effects diversity can have on a company. Diversity in the boardroom can be used as a powerful management tool for the increase performance and better company reputation.