When forming boards of directors, diversity, equity and inclusion has always been essential and necessary. Given the latest guidelines and growing expectations from shareholders, employees, and stakeholders, enhancing board diversity is of major importance. Diverse boards are associated with better decision-making skills, which leads to better outcomes and bigger profits.
Recently, board diversity has been making headlines, as the U.S. Court of Appeals for the Fifth Circuit just upheld Nasdaq’s board diversity rule. This rule was first approved by the SEC in August 2021, but it was challenged on the grounds of being unconstitutional, discriminatory and an attack on free speech. Nasdaq’s board diversity rule states that Nasdaq companies must disclose their board diversity statistics or disclose why they do not. These diversity statistics include having at least one woman director and at least one underrepresented minority or LGBTQ+ director.
This year, according to the 2023 S&P 500 New Director and Diversity Snapshot, the percentage of diverse new directors has slightly declined. In 2023, diverse individuals filled 67% of new director appointments, as opposed to 72% in 2022. Nonetheless, new director appointments are still significantly more diverse than 5-10 years ago. The percentage of diverse first-time directors has also decreased to 75% in 2023 from 82% in 2022. Additionally, 46% of new director appointments are women, meaning there is a 92% increase in new women directors in the past 10 years and for first-time director appointments, 56% of them are women. The percentage of self-identifying minorities filling new director appointments is down from the past two years. In 2023, 15% of new directors are Black or African American, 11% are Asian, and 9% are Hispanic or Latinx. Overall, diverse boards continue to thrive, despite some percentage decreases, compared to past years. Moreover, boards seem to be growing more transparent about their diversity composition statistics. Still, when it comes to board diversity and the advantages it brings, there is always room for improvement.
It’s important to note that diversity is more than just numbers. There are many types of diversity that coexist in the workplace. Internal diversity includes race, ethnicity, gender and sexual orientation. These are what often come to mind when one thinks of the term, “diversity.” But, we cannot overlook external diversity, which includes disability status, socioeconomic and educational background, religious beliefs, language, and nationality.
So, how do we build diverse boards? It’s clear that integrating diverse viewpoints in the boardroom ensures effective oversight of strategy and risk. To achieve this, boards must commit to fostering a culture of inclusivity, creating an encouraging boardroom where directors are able to speak freely.
Additionally, self-evaluation is necessary to understand the current makeup of a board, identify gaps in diversity and establish goals for inclusivity. A board’s annual assessment should be used as an opportunity to think about strategic direction, assess composition, and allow the board to evolve alongside its strategic needs. In order to properly take advantage of this opportunity, board leaders who are effective in and committed to facilitating board diversity, are necessary.
In addition to the importance of an annual assessment, a re-evaluation of recruitment strategies is often beneficial to approaching board diversity. It’s crucial that boards examine their current approach to searching for new directors and their current criteria for filling vacancies, in doing so, recognize the disadvantages of using traditional networking to build boards. It is most valuable to adopt a research-based approach to identify, assess, and select candidates for board positions, leveraging research tools to ensure a diverse, qualified selection of candidates. A longer recruiting period would also expand the range of candidates, allow time to adjust requirements, due to external factors, discourage rushed decision-making and further encourage the search for diverse individuals. Likewise, if the board is able to open the conversation and work directly with investors in recruiting, it is able to be consistent to corporate values, strengthen investor relations and respond to market demands and societal expectations. This avoids closed-off communication within the board and promotes accountability and commitment to diversity.
Ensuring board diversity is no easy feat. After diverse individuals have been appointed, the work isn’t over. It’s important to remember that, rather than just trying to fill in the gaps with more diverse individuals, a board should view achieving diversity goals as an ongoing conversation and commitment. Diverse boards must be adaptable, strategic, engaged and embrace change in order to reach their maximum potential. The potential to reach bigger and better company outcomes makes board diversity an extreme priority. Boards striving to work most efficiently must prioritize diversity in skills, experiences, and perspectives. By extending their influence to the company vision, leadership pipeline and inclusivity programs and by holding themselves accountable for providing accurate diversity statistics, boards are able to actively work towards and constantly improve diversity and inclusion within their organizations.
Jim Johnston
Managing Director
Executive Advisory, Inc.
