Diversity in the boardroom?

Keywords: corporate governance, management board, diversity

A year ago, board members of franchising firm Cendant Corp. resigned amid accusations of accounting irregularities. Their successors came from a variety of backgrounds - much to the approval of business analysts - and the company was praised for recognizing the importance of representing diversity. Read about the broader context of board diversity in diversity in the boardroom

The question of the desirablity and value of board diversity is not new. Yet there can still be disagreement as to the scope and goal of diversity and the way in which this should be achieved.

The Conference Board, the leading global business membership organization, has produced a report on board diversity in US corporations, exploring best practices for broadening the profile of corporate boards. The report's authors explored what motivated boards to increase board diversity, and focussed on trends in diversity on US corporate boards, best practices in recruiting, and best practices in board operations.

Why diversify?

Assuming that board members are rubbing along nicely and a company is doing reasonably well, why diversify?

From respondents' feedback, the report finds that there is no argument for diversity in its own sake. The argument is a business one, the value of diversity being seen as its potential to enhance shareholder value, the board's primary mission. The economic argument rings particularly true given the increasing recognition of the importance to the bottom line of such issues as workplace practices and customer satisfaction. Added to director's core competencies, the additional experience and knowledge bases brought about by diversity can contribute to profit generation.

Diversity as a concept is thus seen as going beyond questions of gender and race, goals including cultural diversity to reflect and aid understanding of an increasingly international market, and representation of different consumer groups, diversity in skills to meet operational priorities and aid decision-making and diversity in age and experience to bring different perspectives. However, institutional investors such as TIAA-CREF and NACD have warned that individual directors should represent all shareholders rather than specific constituencies.

Meanwhile, the argument for women serving on boards is seen as particularly strong, given their equal presence in society, the workforce, among graduates, and in the talent pool. On the issue of diversity of gender and race, the report emphasized "different genders and races bring vital, diverse perspectives."

So is there also a link between diversity and profitability? While there appears to be no proof of this, data from a census of women board directors of Fortune 500 companies indicates that the ten most profitable companies all had at least one, and 80 per cent more than one, woman on the board.

Tracking the trends

In terms of female board representation, the bottom line is that in 1998 in the USA, women held 11.1 per cent of total seats (671 out of a total of 6,064). This was a slight increase on 1997 figures.

Women, in fact, have to date made the most progress in gaining board positions, with the soaps/cosmetics industry, savings institutions and publishing/printing sector reporting the highest percentage of female-held board seats (23.9 per cent, 21.6 per cent and 18.4 per cent respectively). The industries with the lowest percentage of women on their boards were advertising and marketing, food services, engineering and construction, mail package and freight delivery (ranging from 5.7 per cent to 6.7 per cent).

Meanwhile, the sectors with the greatest percentage of companies with no female board representation were engineering and construction (43 per cent) and wholesalers (32 per cent). Companies in the north-east of the country reported higher percentages of women and board members.

So what of ethnicity? While comparisons are difficult because the survey used different reference groups (e.g. Fortune 500 and Fortune 1000) broadly speaking, while 84 per cent of companies had one or more women on the board, only 35 per cent of companies had one or more African-American (male or female) board members, and 11 per cent of companies had one or more Hispanic board members. Meanwhile, of the 643 board seats held by women in 1998, 54 per cent were held by women of colour.

Recruiting for diversity

The CEO has traditionally held the reins of the recruitment process in the USA and, unsurprisingly, CEOs have tended to choose other CEOs for board positions. The report focussed on a number of ways of broadening the recruitment process including acceptance of a wider range of qualifications and recognition of the value of diversity. Wider acceptance of candidates from the non-profit sector is urged as is the professionalization of the recruitment process, use of executive search firms and election of independent directors to nominating committees.

In terms of appropriate candidates, a balance is recommended between emphasis on the required skill and openness to other factors.

So how do you ensure best practice in board operations?

Focussing on best practice

Respondents contributing to the report focussed particularly on how diversity might contribute to board effectiveness and ultimately to shareholder value. While a survey of corporate directors indicated that 139 (or 23 per cent) of the sample had a formal process to evaluate board performance, only 58 of these companies (9 per cent) evaluated individual board members. One of the problems highlighted was the sensitive nature of evaluation.

Clearly however, evaluation is crucial to the determination of the board's professionalization, which brings us back to assessment of the value of diversity.

To optimize board performance, it was agreed that executive development and new director orientation was important with interaction including both management and outside board members. Committee assignments for new directors, e.g. women and members of minority groups, could introduce them to the workings of the company. In addition, extending membership of key committees to women and members of minority groups is a pointer to the extent to which a company values board diversity.

8th October 2001

This is a précis of a Conference Board report entitled "Board diversity in US corporations: best practices for broadening the profile of corporate boards."

The authors were Carolyn Kay Brancato, Director of the Global Corporate Governance Research Center at the Conference Board and D.Jeanne Patterson, Professor of Finance and Public Policy at Indiana University and a consultant to the Conference Board.

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