Economic and social dynamics, along with advancements in technology, have drastically changed the landscape in the corporate marketplace over the last decade. The changes have greatly impacted the type of leadership that's required for companies to successfully navigate a path forward. Shareholders, institutional investors and regulators have been vocal about the need for corporate boards to move quickly toward transforming their boards to be as diverse as possible. Research indicates that diverse boards outperform boards that lack diversity. Best practices concur with their efforts to motivate boards to make a firm commitment toward composing diverse boards.
Qualified, diverse candidates for board directorships abound if you know where to look for them and you have adequate vacancies on your board when they're available. Making changes in board composition calls for sweeping changes in the structure of the board recruitment and succession planning processes. Today's boards have to evaluate whether it makes sense for retiring CEOs to join their board, re-evaluate age limits and term limits, be open to first-time board directors, be forward-thinking, and make a solid commitment to creating a diverse, capable board of directors.
5 Best Practices for Improving Board Diversity
Consider these five steps that boards and their committees can take to create a more diversified board.
1. Look Beyond Sitting and Retired CEOs
Tradition in the corporate world dictates that most CEOs can count on getting a seat on the board of directors as soon as they retire. There is some inherent benefit to this strategy as the company continues to benefit from the CEO's human capital as a board director.
As another benefit for the company, former CEOs on the board may discourage exiting CEOs from working to increase short-term earnings and inhibiting long-term projects to bolster the earnings performance for the current period. Former CEOs on the board will insist that sitting CEOs continue working hard and in the best interests of the shareholders until the end of their term.
CEOs who are soon to be retiring may have the skills needed to serve their tenure. Boards should be aware that the Information Age and the economy have changed everything. Before offering a current CEO a position on the board, boards should ensure that they have the necessary skills to meet the needs of the board over the next three to five years, have a fair amount of technical knowledge and expertise, and have the skills and characteristics that fill the overall gaps in the board composition matrix.
2. Set Age Limits and Term Limits
Establishing age limits and term limits drive board refreshment and give boards opportunities to bring in more diversity. Investors are voicing concerns about age limits that are too high and the lack of reasonable term limits for board directors. Some investors are choosing to screen companies for director tenure before casting their votes for or against candidates. Investors are concerned that directors that serve too long either because of age limits or board terms may not be as objective or as independent as the board needs them to be.
Deloitte's Board Practices Report: Perspectives from the Boardroom states that the most common age limits for board directors are 72 and 75, and sometimes even older. Some companies make it a practice of raising the age limit for board directorship to enable favored board directors to continue serving longer. Without reasonable age limits, board directors can serve and get paid as long as they wish even if they're not providing value to the board and even if they don't have the skills to support modern governance.
3. Make Diversity a Top Priority
The boards that make a firm commitment to increasing diversity on their boards will be the most successful in doing so. That commitment will need to come from the top leaders, including the CEO, board chair, nominating committee chair and lead independent board director.
Several organizations have made their mark on educating the corporate world about the importance and benefits of adding women to corporate boards and increasing diversity in general. Catalyst, the 30% Coalition, 2020 Women on Boards and Alliance for Board Diversity have joined the investors' call for greater board diversity. Their efforts have demonstrated an increase in women on boards, although the trend is moving slowly. The Deloitte Global Center for Corporate Governance: Women in the Boardroom: A Global Perspective provides a report from 49 countries that shows that women hold 12% of the board seats across the globe and only 4% of the women serve as board chair.
Boards should be holding nominating committees and search firms accountable for increasing diversity on their boards.
4. Consider First-Time Board Directors
In their efforts to increase board diversity, many boards are breaking the mold and seeking out first-time board directors to fill their board seats. Nominating committees will find more diversity in candidates who are skilled and well-prepared for board service, but lack experience.
In considering first-time board directors, boards should consider whether candidates have sufficient time to dedicate to board service for the short term and the long term. It's expected that board directors will attend meetings quarterly or bimonthly, but they also need to understand that the time could double or triple if the company entered a major transaction or went into crisis. Board directors also need to allow time in their schedules to prepare for meetings, join in on conference calls and vet the competition. Qualified board directors should have a clear understanding between the roles of directors and managers and add value to the board as a whole.
5. Compose a Board for the Future
Corporate issues are changing so fast that the skills boards needed yesterday are becoming quickly outdated. In looking toward forming a qualified, diverse board, nominating committees must seriously consider what skills and abilities are needed from the board to support its strategy over the next three to five years. Boards will need greater agility, which will require opening up new opportunities for board candidates with a wide diversity of backgrounds.
Business professionals with managerial experience, IT expertise and specialized backgrounds will be especially valued. While women lack CEO experience on the whole, there's no shortage of women with entrepreneurial and leadership experience.
In past years, boards have had the reputation of being anything but diversified. It appears that is about to change as more companies target diverse groups of people to fill their board seats. For boards to meet the requirements of the new age, they'll need to consider their present position and compare it to where they want to be in the next five years. A step toward modern governance means that companies will carefully compare board candidates to the existing talent and fill the vacancy with the profile of one who has the needed skills, experience and diversity to fully complete the board in a meaningful way.