Though most of us are content to leave 2020 in the rearview mirror, it is nonetheless a year that has reshaped our economy and our social priorities. This rings especially true in matters of diversity, inclusion, racial equality and social justice. This year has taught businesses from Wall Street to Main Street that mere efforts in these areas are no longer sufficient. Shareholders and consumers expect results.
Corporate boardrooms represent one of the greatest areas of opportunity to enhance diversity in corporate leadership. Requirements by states like Illinois and California to report on and meet certain boardroom diversity standards are helping to move the needle. Consider this: Today there are no S&P 500 firms reporting all-male boards, and a majority of S&P 1500 boards have at least three female directors. Still, there remains much to be done.
Nasdaq has made a significant statement about the importance of boardroom diversity. In December 2020, it filed a proposal with the Securities and Exchange Commission that, if adopted, would require companies listed on the Nasdaq’s U.S. exchange to have, or explain why they do not have, at least two directors who self-identify as meeting certain diversity requirements (female, under-represented minority or LGBTQ+) and to provide ongoing disclosure about diversity statistics pertaining to their boards of directors. Nasdaq cited a desire to “enhance investor confidence.” Given the broad support, there is every reason to believe that the rule will be adopted as proposed. Boardroom diversity is no longer a best practice. It is a mandate.
Below is a practical roadmap for board leaders committed to making diversity and inclusion a part of the fabric of their boardrooms.
UNDERSTAND DIVERSITY WITHIN YOUR BUSINESS
First, the board must understand diversity through the lens of its own business. There is overwhelming evidence that leadership diversity is good for business. Too often, however, diversity is narrowly defined, which can lead to resistance and stalled efforts.
Looking at board diversity through the lens of existing business opportunities may help board members understand the value that diverse representation can bring to the bottom line. Identify key business goals, objectives and challenges at hand and outline the knowledge, skills and abilities (KSAs) a director should have to help address them. Is the company targeting younger customers? Is it trying to become more digitally focused? How would a candidate with less traditional credentials view a problem the company is facing differently? What qualities does the consumer or end-user possess that could be mirrored internally?
DEFINE YOUR GOAL AND STEPS FOR ACCOUNTABILITY
Second, the board must define its goal and take steps to hold itself accountable. Perhaps the board commits to allocating a set number of hours per month to minority recruitment. Or it endeavors to create term limits, or promises that 75 percent of future interviews will go to women or members of under-represented groups. Even bolder, maybe the board pledges to onboard a set number of women within the calendar year. Whatever the goal, it must be clearly defined and widely communicated. Reporting diversity goals proactively to shareholders and in proxy statements will create a new level of transparency and accountability necessary for achieving meaningful progress. In this regard, use the proxy statement as a tool to communicate your goals and your commitment to achieving them.
RECONSIDER YOUR RECRUITMENT VENUES
Third, the venues and processes through which directors are recruited must be entirely reconsidered. The manner in which boards typically recruit potential directors is homogenous, hindering efforts to achieve diversity and inclusion. Board members often come from committee members’ professional or social circles and frequently have a similar resume. Although those types of appointments carry minimal risk, they don’t always benefit the company.
Consider placing a pause on internal recruitment. Instead, try partnering with an independent recruiting firm that has demonstrated success in helping diversify companies’ C-suites and boardrooms. Armed with the KSAs previously identified by the board as being instrumental, they can deliver a diverse talent pool — including first-time directors, women, minority candidates and younger professionals — and set the board up for a successful evaluation process.
RETHINK EVALUATION TO AVOID UNCONSCIOUS BIAS
Fourth, a diverse candidate pool is a critical starting point, but it’s meaningless if the evaluation process doesn’t promote diversity. Board leadership must rethink the evaluation process, including the criteria against which potential directors are measured.
Avoid unconscious bias at the outset by setting some parameters for the evaluation period. The first step is to specify evaluation criteria that is in line with the KSAs identified to be critical to the business — not positions that traditionally are attractive or comfortable for shareholders — and stay true to them throughout the process. Then, consider a blind review of all resumes and CVs, redacting information such as names and dates of graduation from the document to encourage an open mind. Finally, consider conducting less traditional in-person interviews, perhaps by letting the candidate choose an interview venue that demonstrates the value she or he will bring to the board.
Don’t let incremental progress cause a false sense of accomplishment. Boardroom diversity is not achieved by checking the box. Appointing a woman or a member of an under-represented community does not constitute success. Boards that are serious about building more inclusive, representative boardrooms must recognize the long-term and ongoing commitment required.
Start by making diversity and inclusion part of every discussion. Is the board making progress toward its goal? Where are additional opportunities for increased representation, such as on the nominating committee? How can incremental successes be celebrated internally and with shareholders and customers?
Baking commitment to boardroom diversity into the culture is the only way to turn progress into results. Corporate governance leaders must insist on specific measures that lead to a defined goal. Only then will shareholders, companies and consumers realize the value of truly diverse, inclusive boardrooms.
Geoffrey R. Morgan is a founding partner of Croke Fairchild Morgan & Beres in Chicago. He provides strategic guidance to growth-stage startups and Fortune 500 companies in areas of corporate governance, corporate finance, M&A and securities regulation.