Illinois recently passed a law requiring companies to report the demographics of their boards and executives—a watered-down version of the original bill that would have required all corporate boards to have at least one woman, one African American, and one Latino by 2020 or face a $100,000 fine.
This comes after California passed a law last year mandating that boards of six or more members have at least three women. That means corporate boards in California need to add 692 more women to their ranks by 2021. Additional states such as New Jersey and Massachusetts are also considering board diversity legislation.
While we are heartened by these positive first steps, the reality is that none of these laws as written will lead businesses to actually reap the benefits of true diversity. Diversity—not just gender or racial diversity but also diversity of thought, geography, age, and industry—is proven to create shareholder value and enhance business results. Studies have shown that companies with diverse leadership teams produce 19% more revenue, the majority of which is due to increased innovation. Better gender diversity alone can increase revenue upwards of 41%.
On the one hand, diversity laws are essential, and we believe we’re at an inflection point where laws similar to the one passed in California may become the norm nationwide. After a few critical states with the majority of corporate HQs pass these laws, we will see a rapid, proactive realignment of corporate boards to meet the new requirements, even if companies believe the laws are unconstitutional. No one wants the negative PR attention that would come from fighting pro-diversity regulation.
But in order to truly move the needle, boards should be at least majority diverse. Many of the most successful boards are majority diverse, including those at Aflac, Kaiser Permanente and Koppers.
However, despite these clear-cut business incentives, far too many companies acknowledge the problem without taking any concerted action. Fortunately, there are a number of practical steps boards can take to become majority diverse.
CHANGE THE MINDSET
First and foremost, board members absolutely must stop considering one (or three) seats to be “diverse seats.” This mindset sends the wrong message on inclusion while simultaneously minimizing people of color’s contributions and voices by devaluing their deserved seats. It limits the potential for innovation and dynamic thinking in the boardroom.
Boards also need diversity-minded directors in leadership roles, especially on the Nominating and Governance committee in the role of chair and lead independent director. These leadership positions have disproportionate influence on future board composition. If the Nominating and Governance Committee has an honest, aspirational approach to diversity, then the rest of the board can, too. Certainly the majority of the burden falls on white men to change their mindset, but women and other diverse directors can help accelerate the process by encouraging white men to be advocates and inviting them to join the conversation.
INJECT THE BOARD WITH FRESH TALENT
The average age for board members is now 62 years old, and the average director tenure is 9 years. Notably, male directors’ average board service is nearly three years longer than the average tenure for women. While some of the highest performing directors may be the longest-serving ones, in recent years, more boards have moved to eliminate mandatory retirement ages, which ends up preserving the spots of underperforming directors. With the rapid pace of economic and social change, slow-to-change boards can put entire businesses at risk. We expect average director tenure to drop significantly in the near future as disruptive forces continue to impact traditional business models and the need for more relevant board member skills and experiences accelerates.
Dynamic board refreshment practices that emphasize diversity should be a top priority. Instituting mandatory retirement ages helps, but even better would be to create a more rigorous internal self-evaluation process to clearly identify underperforming directors and facilitate their graceful exit – before an activist mounts a campaign to change the board’s composition. The benefits are two-fold: increased performance and the capacity for new talent. Boards could also increase their size either temporarily or permanently to make room for new diverse members.
DO BETTER IN THE TALENT SEARCH
There is an ever-growing pipeline of diverse talent ready to be tapped. Our organization, the Directors Academy, has over 100 highly qualified, diverse senior executives ready to move into the boardroom. Boards should require that every search start with a full slate of diverse candidates. This approach will not compromise the quality of the search in terms of skills or experience. It takes an intentional, concerted recruitment process. Boards should not expect diverse talent to self-generate from their existing networks, which are likely to be populated by white males.
EXECUTIVES NEED TO ACT, TOO
The vast majority of new corporate directors come from the C-suites of public companies. So if the executives of these companies don’t commit to building diverse leadership teams, the talent pipeline runs the risk of stagnation. CEOs should also commit to including an outside corporate board membership as a part of their team’s executive career development, providing diverse executives essential experience to draw upon as future corporate leaders.
Ultimately, we need more than a law to increase diversity on corporate boards. While laws such the ones passed in California and in Illinois are starting points, they risk token diversity and complacency without an accompanying change of mindset and policy in the boardroom. Shifting the way we think about board composition is critical. Taking the important steps to actually make our corporate boards majority diverse is hard work, but the payoff will be significant: sustainable value over the long term.