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No Small Task: Improving and Measuring Diversity at the Top Requires Continued Attention

by Jim DeLoach

A diverse, equitable and inclusive culture contributes to organizations’ success by positioning directors and senior executives to add value in evolving markets. Do your board and C-suite measure up?

Diversity in the boardroom and the C-suite encompasses such attributes as education, experience, gender, racial and ethnic background, geographic origin, age, digital savvy and specific areas of expertise (e.g., M&A). There is compelling research asserting that a diverse board leads to improved performance and innovation. One study found that boards with greater gender diversity — particularly those with at least three women — are more likely to prioritize innovation and technology. It is not a stretch to presume that such diversity applies to the C-suite as well.

Equity and inclusion are also important attributes of culture at the top of the organization in its leaders and directors. Inclusion entails onboarding previously excluded parties and, once they are at the boardroom and C-suite tables, facilitating an open environment conducive to dialogue and feedback. Equity is all about fairness, access and commitment to break down barriers, both real and perceived, to achieving diversity and inclusion.

The market is driving more attention to diversity, equity and inclusion (DEI). Institutional investors led by BlackRock and State Street are sounding the bell not only for gender diversity but for racial diversity as well. Nasdaq in the United States has implemented Rule 5605(f), which generally requires listed companies to have at least one self-identified female director and one director who self-identifies as an underrepresented minority or as LGBTQ+. Companies failing to disclose board diversity information face the threat of delisting.

Whether other exchanges in the U.S. follow suit remains to be seen. If they do, it would align the listing standards of U.S. exchanges with changes Institutional Shareholder Services (ISS) made to its proxy voting recommendations and with developments in certain countries around the world on the gender diversity front.

And there is work to be done on that front. One study reported that 82.5 percent of directors among Fortune 500 company boards were Caucasian as of June 2020 and that 26.5 percent of directors were women. (However, between July 2020 and May 2021, 32 percent of newly appointed board members in the S&P 500 were Black, according to an analysis by ISS Corporate Solutions — a jump from 11 percent the previous year. This improvement is likely due to reactions to calls for improved boardroom diversity arising from investor groups and the spotlight cast on social justice issues emerging in the spring of 2020.)

As for senior leadership positions, an ISS study found that women and ethnically diverse executives hold only 7 percent and 9 percent, respectively, of the CEO positions among Fortune 500 companies. More importantly, another study found that women (and, to a lesser extent, ethnically diverse executives) who directly report to the CEO are underrepresented in positions that directly feed into future CEO and board roles, e.g., CFO and P&L leaders) and have greater representation in positions that are less likely to lead to these appointments (such as general counsel or human resources). Bottom line, not only does the C-suite exhibit a lack of diversity, so does the complement of executives in the pipeline that will feed the C-suite in the coming years.

As a result, questions continue to be raised on the diversity front. Are your board and executive management doing enough? Have the board and the CEO agreed on the diversity goals given the company’s strategy, markets, digital maturity and circumstances? Is there a timeline for achieving those goals? Is progress toward adding diversity to the board, executive team and executive bench monitored, and is the progress satisfactory? Whatever the answers, here are six suggestions for making demonstrable progress in improving diversity at the top.

Dispel the Myth of Fit

It’s time to get uncomfortable. Fit has been part of the lexicon for a long time when evaluating board and senior executive candidates. A candidate may have the requisite knowledge, experience and expertise, but will he or she be an appropriate “fit” on a given board replete with current and former CEOs? Will a particular candidate be a proper “fit” as a member of the executive team? Granted, board and senior executive candidates must bring a broader business acumen to the table than one who is confined to a specific domain of expertise. However, “fit” cannot be an excuse to sustain the status quo, nor should it be a cover for unconscious bias or other barriers to the participation of women and underrepresented minorities in the boardroom and C-suite. Diversity itself refers to the existence of differences, and boards and CEOs should value the differences in backgrounds, experiences and perspectives. The other side of the coin is groupthink.

Strengthen Resolve to Move the Meter

It all starts with the requirements that boards and executive teams dictate when looking for candidates. If the screening criteria for a board seat stipulate “a retired CEO who ran a large company at scale in the technology industry or a former CEO who managed through a crisis,” the available candidates will likely be white males. However, many others can fit the board’s needs if the search criteria are expanded. For example, a leader of a significant division within a larger company may fit the requirement. So may a departmental executive who has demonstrated exceptional leadership capabilities through periods of significant growth and disruption. Likewise, efforts should be made to transition the process for recruiting and promoting talent for the executive bench pipeline that feeds the C-suite. For example, job descriptions should be reviewed with an eye toward reducing bias and making the specifications included in them more gender-neutral.

Personal and professional experience, skills, currency and a strong commitment to continuous learning should open the door for women and underrepresented minorities to the boardroom and the pathway to the C-suite. To find women, racially diverse individuals or other candidates who meet the board’s and executive team’s diversity objectives, take a close look at how new directors are sourced and qualified and how senior executives are nurtured and developed. Is there evidence of unconscious bias in the search and development processes?

If the search firms and other channels used to identify candidates can’t come up with viable choices, should other venues be explored? Improving diversity may require disrupting the tried and true processes used in the past. For example, for boards, consider accessing talent pools developed by organizations such as Women Corporate Directors, Ascend/Pinnacle, Registry of Black Corporate Directors or Latino Corporate Directors Association.

Be Courageous

Boards and CEOs exemplify their true character in the manner in which they pursue DEI goals. One board member or senior executive different from all the others is unlikely to make a significant difference. Don’t expect a single minority board member to have a disproportionate impact and, as a result, potentially set this person up for failure. Recognize the research that says meaningful change comes with three members who meet DEI criteria because this intentionally creates an environment in which individuals with different perspectives have a seat at the table. To foster innovation, the board and executive team need members who have diverse experiences stemming from varied backgrounds and, as a result, think about things differently and foster creativity when contributing to strategic and divergent conversations. And once these members are at the table, they should be nurtured by the chair and CEO to ensure their views are heard.

Champion the Benefits of Diversity

Beyond the empirical evidence that diverse boards and executive teams lead to better performance, they also attract diversity in the organization itself. The longstanding strategic war for talent continues to get more competitive as companies broaden out the workforce. When “A” players look at the composition of the company’s board and executive team, do they see a diverse group of leaders that attracts them to the company and gains their trust? If they don’t, is the lack of diversity likely to hamstring the company’s efforts to acquire the talent it needs?

Similarly, is the composition of the board and executive team aligned with evolving markets? An outward view of the changing demographics of the customers the company serves and aspires to serve adds perspective. Is the current diversity in the boardroom and C-suite positioning the company to exploit market opportunities over the next three to five years? If not, is the organization acting with intention to address this gap? The stats and evolving perspectives on “overboarding” — a term for directors sitting on an excessive number of boards — suggest there are opportunities for boards to free up positions for women and underrepresented minorities.

Be an Ally

All individuals are products of their experiences. In today’s era, directors and senior executives can enrich their lives by increasing the diversity of their respective networks. Engaging in uncomfortable conversations in different forums to listen and learn can help increase their sensitivity to diversity as they position themselves to reduce unconscious bias when screening and selecting candidates. Leaders should make it a priority to include women and minorities when taking time to mentor promising executives. From the board’s perspective, meeting the company’s top 20-25 leaders engages the board more actively not only in succession planning and evaluating executive bench strength and diversity but also in mentoring and sponsoring future directors, including women and underrepresented minorities.

Achieve Transparency With Metrics and Accountability

Bringing diversity into the boardroom, into the C-suite or onto the customer-facing front lines begins with engagement, putting data in front of decision-makers, embracing the data, setting objectives and adopting a plan driven by every business leader based on needs and circumstances. Dashboards should focus on how the company is doing in recruiting a diverse workforce and fostering an inclusive workplace, as well as employee satisfaction with the company’s progress in achieving DEI objectives. Once objectives and expectations are set, results are best achieved through a transparent focus on measuring progress and linking compensation to performance. As for the board, directors should expect annual progress and look to its own example in setting the tone as well as the example set by the CEO, CFO and other leaders.

Diversity Is a Journey, Not a Destination

Diversity is not a check-the-box destination. It is much more than an evolving conversation and a journey. A commitment to DEI is a continuous process that, when entrenched into the nominating committee’s mindset, criteria and expectations for considering board candidates, is virtually inseparable from the selection process. Similarly, a DEI mindset as well as criteria and expectations should be baked into the company’s leadership development process. But this can happen only when greater diversity is achieved.

That is why, for the shorter term at least, emphasis should be given disproportionately to advancing diversity in the boardroom and in the pipeline feeding talent into the C-suite. A company’s circumstances will change over time, but the need for diversity of thought will not. Consequently, a holistic view of diversity by the nominating committee, the full board, the CEO and the leadership development process will help sustain the effectiveness of the board and executive team in the years to come.

Questions for Senior Executives and Boards

Following are some suggested questions that senior executives and boards of directors may consider, based on the risks inherent in the company’s operations:

  • Do the board’s actions regarding diversity, equity and inclusion resonate throughout the organization? Are the nominating committee’s selection process and the respective views of the chair, the full board and the CEO fully aligned with respect to accountability for delivering a diverse and inclusive workforce and organization? Do the board and executive team have a line of sight into the recruitment and acquisition of new and diverse talent?
  • Is the company’s culture strong enough to challenge conventional thinking and recognize the need to be disruptive, resilient and agile in response to market developments? Does it foster an open environment that encourages tough conversations and feedback? For example, when the executive team discusses the direction and progress of the company’s innovation strategy and culture, is the CEO satisfied with the quality and creativity of the ideas introduced during the dialogue?
  • If significant gaps exist with respect to diversity in the board’s composition, does the nominating committee have a commitment to diversity and has it developed a plan that makes diversity deliberately central to the selection process? Likewise, is the company’s succession planning and talent development process focused on addressed gaps, if any, in the C-suite?

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Republished with permission. This articial originally appeared on Corporate Compliance Insights

Jim DeLoach is a managing director with Protiviti, a global consulting firm. He has more than 40 years of experience in assisting companies with responding to government mandates, shareholder demands and a rapidly changing business environment in a cost-effective and sustainable manner, including the integration of risk and uncertainty with strategy setting, business planning and performance management. He is also noted for his expertise in corporate governance, enterprise risk management and designing and evaluating internal control and compliance systems. He was named to the National Association of Corporate Directors’ Directorship 100 list in 2012 through 2018, recognizing him as one of the 100 most influential governance professionals in the boardroom community.

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