The Executive Advisory 2021 Diversity Review

The past year has brought renewed attention to racial inequity, prompting more and more companies to design concrete plans for promoting diversity and inclusion in the boardroom. The past decade has seen a 26% increase in female representation among S&P 500 new directors, but only a 10% increase in minority director representation. Moreover, minority directors have just now reached the same level of representation that female directors had a decade ago. Because of this, boards will face growing pressure to prioritize minority recruiting in the coming year.

Unlike gender diversity, assessing the racial and ethnic composition of a board is a challenging and imperfect process. As a result, expectations for greater transparency are growing. This year, 123 companies in the S&P 500 included a statement in their proxy on their commitment to considering diversity when recruiting new directors.

Of the 413 new independent directors who joined the S&P 500 over the past year, 53% were men, 47% were women, and only 22% were from underrepresented racial and ethnic groups. Meanwhile, there are three times as many non-minority first time directors as there are minority ones indicating that boards are more willing to hire younger and first time non-minority directors. This represents a moment of opportunity for boards to reexamine their stance on recruiting new talent and prioritize diversity and inclusion.

A board’s ability to provide appropriate oversight of strategy and risk requires the right set of skills, experiences, and perspectives in the boardroom. There are actionable steps that boards can take to ensure that they incorporate a diversity of perspectives into their boardroom environment. Firstly, boards ought to recognize that diversity is more important than numbers and that they should be fostering an inclusive culture in the boardroom. This means taking steps to ensure the boardroom environment is one in which directors are encouraged to engage with issues and share their ideas. Moreover, this means self-evaluation: how does the board currently define its culture, and what are its goals for inclusivity?

The annual assessment process can be a useful tool for self-evaluation and to facilitate refreshment. Boards should take this opportunity to consider their strategic direction, think critically about their composition, and refresh the board as their strategic needs change. An important question to consider in this process is whether or not the annual assessment evaluates diversity beyond skills and qualifications. On a higher level, it is important to elect board leadership members who understand the need for diversity and inclusion and are motivated to facilitate it. Nomination and governance chairs have the most impact in this area, given their influence on board composition, while the independent board chair can help the board augment its diversity and oversee diversity and inclusion on a larger scale.

Boards can enhance their oversight of diversity and inclusion by holding themselves accountable for accurate reporting of diversity metrics. The CEO and management team are accountable for monitoring the success of diversity and inclusion metrics throughout the company and the board can help this effort by setting the tone for improvement in their own reporting. As investors continue to press for increased disclosure of diversity metrics, the board can ensure that they are disclosing accurate information by practicing accountability.
One of the largest forces, holding boards back from achieving their diversity goals, is their recruitment strategy. A new push for diversity should lead boards to reassess their search approach and criteria. This includes identifying the weaknesses of using traditional networking as a recruitment strategy and being open to candidates with diverse professional backgrounds. Recent surveys show that there are fewer minority executives in C-suite roles than non-minorities, so boards should make a greater effort to expand their candidate pool outside of these positions. In lieu of traditional networking, boards should have a disciplined, research-based approach to board identification with a longer recruiting period. The board should be engaging outside its networks in order to expand its ability to form a diverse candidate pool and should engage directly with investors to ensure that it can form the optimal board composition. That being said, it is important for directors to recognize their own biases and avoid viewing a push for diversity as a pressure to “fill in the gaps.” Building and maintaining a diverse board is an ongoing process, and every new director search is an opportunity to commit to considering a diverse, qualified slate of candidates.

Beyond the boardroom, boards can influence change by providing oversight over management diversity efforts. The board should understand the CEO’s vision for diversity and inclusion within the company, including the diversity of the leadership pipeline, the inclusivity of company culture, the current data on the diversity makeup of the workforce and what diversity and inclusion programs are in place. Boards should understand how their company is viewed by stakeholders and how the management team reflects the diversity of those stakeholders. Board members ought to ask themselves what diversity means for the company and for the directors, how diversity and inclusion metrics are being overseen and how their diversity and inclusion oversight can be enhanced.

The increased attention to racial inequity, over this past year, has further amplified the importance of diversity in the boardroom. It is important that boards not only recognize this inequity, but that they take actionable steps, within their own organization, towards greater diversity and inclusion.

Jim Johnston
Managing Director
Executive Advisory Inc

Share This: