Mirroring the Marketplace with Board Diversity

October 13, 2016

Mirroring the Marketplace with Board Diversity

What will our company look like in 15 to 20 years?

That’s a question that many major company boards are not asking of themselves, and the result is that directors are being selected or re-elected who do not objectively represent shareholders, employees, and consumers.

This question is really at the heart of the “diversity” issue and the purpose of the board. From a historical perspective the concept of board diversity didn’t really start as strictly a gender or ethnic-based issue. It really started as functional and market diversification issues wherein boards needed people who represent the marketplace and had specific functional expertise; i.e. auditing, finance or marketing. This concept evolved as the global economy expanded, resulting in the need for boards to diversify with women and people of varied ethnic backgrounds to mirror the market place.

Unfortunately, recognition of this dynamic has only been embraced by a minority of boards. Let’s take, for example, women who represent half of the buyers in the United States. They make the majority of decisions regarding many issues, including healthcare, food, homes and home goods.

This is not a stereotype. It is simply factual.   And what is also purely factual is that the representation of women and minorities on boards remains low. For example, recent published findings[1] related to 2015-2016 for the Fortune 500 reveal that:

  • Women held slightly under 30 percent of U.S. board seats.
  • Less than one-fifth of companies in the U.S. had 25 percent or more women directors.
  • Asian/Asian-Americans held approximately 5 percent.
  • Hispanics held about 4 percent.
  • African-Americans held less than 10 percent.

Not recognizing the importance of diversity—for purely empirical reasons—points to an important issue: Boards are doing a disservice to all stakeholders. The singular message is that boards cannot be homogenous and understand a global economy or best serve their stakeholders. They must reflect diversity of functions, gender, ethnicity and geographical penetration. Board composition must diversify based on what a company sells and where—today and into the future—to solve the specific financial, supply chain, technological and human capital issues they face.

It isn’t rocket science but it does require commitment to both shareholders and consumers over the longer term. When a U.S. company expands operations to the Far East, for example, it would be advisable to have board members who intimately understand that market, buying habits, and work cultures. Again, it gets back to the concept of market diversification.

While there is recognition of this issue, it’s clear that companies globally are woefully short-sighted in this area. For example, a recent survey[2]  of more than 600 European companies reported that:

  • Women comprise 25 percent of boards, a significant increase from the 12 percent in 2011.
  • Only 3 percent of European companies have women CEOs.

This dynamic reflected within venture capital firms in the United States is more surprising, where men comprise more than 90 percent of boards. These numbers suggest that board selection simply isn’t being taken seriously, and as such, isn’t as strategically effective as it could be for stakeholders of companies.

While there have been improvements, there is still much to be done that can enhance corporate performance.  Here are some broad suggestions to make board selection more effective and get the process moving in the right direction:

  • First, recognition that the chairman of the board must be focused on the future, while the Management Board or Executive Committee should be concerned about the shorter term. As statistics show that CEOs change about every five years, the board should represent the company’s growth opportunities and overall stability for the longer term.
  • Boards should be made up of those who have succeeded to senior levels and proven their leadership skills broadly and deeply and their understanding of the marketplace. Friends and family members of the CEO may not have the understanding to best serve stakeholders.
  • Commitment to be present at board meetings and legal accountability must be stressed and there must be recognition that serving on a board is a serious position requiring real work. There have been strides in this area as some companies are being careful to recruit only senior-level executives who serve on no more than two boards due to the time commitment.
  • Boards must be truly independent, willing to counsel and debate the CEO for the betterment of the company and this requires diversification of skills and functions. The goal is strategic advancement of the company and to avoid such harm to stakeholders and employees as happened with Enron and many other companies.
  • To avoid conflict of interest, directors should be compensated with cash as opposed to stock.

Diversity on all levels is important because it simply positions a company to better compete, understand its global markets, be more innovative, lower risks and financial harm. Progress has been made, but these efforts must be continued aggressively if corporations are to expect maximum contribution from their boards.

 

[2] Gender Diversity on European Boards: Realizing Europe’s Potential: Progress and Challenges. A European Women on Boards study, carried out in partnership with ISS; published by European Women on Boards. May 2016.

The Authors: 

Mary Matthews is the managing director of the New York office of Stanton Chase, a global retained executive search firm with 70 offices in 43 countries. She has extensive experience in recruiting board members for global companies. She has recruited world-class leadership teams and board members for multi-national, Fortune 500 and middle market companies, as well as private capital firms.