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Myths and Misconceptions About Corporate Board Diversity
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In the world of corporate boards and board diversity, there is both good news and bad news.
First, the good news: Almost all (97%) of the of the top 200 S&P 500 companies now have minority directors (defined as Black/African American, Hispanic/Latinx, and Asian) on their boards. In fact, 71% have two or more minority directors.
The bad news is that there is still much work to be done. Many mid- and small-cap companies have boards that are homogeneous. There are still 622 public company boards in the United States with zero women. Furthermore, while underrepresented ethnic and racial groups make up 40% of the U.S. population, they make up just 12.5% of board directors.
So, what is holding many companies back? Why, despite years of evidence demonstrating that diverse boards lead to better business results, does resistance to change persist?
For starters, there’s a lingering belief that the push for board diversity is just an exercise in social good. Undoubtedly, diversity in boardrooms does benefit society and is a social good — but the value is so much more than this. A number of myths continue to hinder diversity of boards:
This has been a common refrain for as long as there have been discussions about diversity in the boardroom. In 2013 when Twitter filed for its IPO, it’s board was entirely male. This created much controversy. The company’s defense included a comment by then-CEO Dick Costello that Twitter did not simply want to check a box with gender diversity. The implication was that there were no women who were actually qualified to sit on the board and appointing one would simply be a “check-the-box” exercise.
Since then, Twitter has made some progress. Its board is now 30% female and 20% underrepresented minorities. It has also become clear to many that the problem is not with “supply” but rather with “demand.”
Every board must have those who have managed an organization. Every board also needs strong finance expertise. But the harsh reality is that only naming CEOs and CFOs to a board will limit the number of women and minorities who can gain a seat. It will also most definitely limit the robustness of the conversation.
Boards would better serve themselves by adding technology expertise, marketing chops, and human capital talent to their assemblage. Depending on the company, digital transformation, regulatory expertise, and manufacturing could also be necessary. The point is that boards need to go beyond the traditional CEO and CFO world to populate themselves. Diversity of career, role, and experience is beneficial for the boardroom.
This can also be referred to as the “one and done” phenomenon. Rather than appreciate the true value that diversity can bring to conversation, deliberation, and decision-making, there are those for whom this is a compliance exercise.
Yet there are increasing mandates for diversity in the boardroom. Most notable is the SEC’s August 2021 approval of the Nasdaq Stock Market’s listing rules related to enhancing corporate board diversity. Specifically, Nasdaq-listed companies will generally be required to have at least one female and one under-represented minority on their board by August 2025.
California has also been progressive in mandating board diversity. Assembly Bill 979 states that by the close of 2022, corporations headquartered in California with more than four but fewer than nine directors must have a minimum of two directors from underrepresented communities. And companies with nine or more directors need to have a minimum of three directors from underrepresented communities.
This final myth ebbs and flows in terms of its applicability and usefulness as an excuse for the status quo. During the early part of the pandemic, most companies and their boards were in full-blown crisis mode, and as such, big-picture items such as diversity took a backseat to managing pressing issues related to supply chain and employee health.
However, following the murder of George Floyd in May 2020, organizations shifted their focus to social-justice issues, including diversity at all levels within the organization. Consequently, the attention to these issues became ubiquitous and powerful.
Nonetheless, there remains a perception that a focus on diversity, or the lack thereof, is in some ways separate and aside from running the business. It is viewed almost as a luxury and a staff item that can take a backseat to almost everything else.
This mistake is critical because if there is one lesson we learned during the pandemic, it is that human capital is everything and can make or break a business. Best practices of human capital from the boardroom on down through the organization call for diversity of thought to facilitate innovation, creativity, and risk mitigation.
All of which is to say that boards are facing ever more challenges. Problems are complex and solutions are often out of view. However, we know for certain that diversity leads to better decision-making and better business outcomes. Therefore, it is time to clarify the facts and forge ahead.