When and Why Diversity Improves Your Board's Performance

Nicholas J Price

In recent years, investors and regulators have placed increasing pressure on boards to improve their performance. As a rule, they've been encouraging greater gender and ethnic diversity as a step toward better performance. As companies have begun moving in that direction, research is emerging that shows that the connection between diversity and board performance entails more than adding women to the board or expanding ethnic diversity, leaving many to wonder why diversity improves board performance. In many cases, increasing board diversity hasn't made any difference at all.

Such mixed results are causing governance experts to take a deeper dive on questions about when diversity matters, whether different types of diversity matter and why certain types of diversity matter. Recent research should also have us questioning whether board culture or other issues are having an impact on board and corporate performance.

Modern governance accounts for the diversity-related factors that truly make a positive impact on performance. Board management software solutions, such as board self-evaluation software and nominations software, are the modern approaches to maximizing the impact of board diversity.

Trends Toward Corporate Diversification

The United States has lagged behind other areas of the world in making noticeable changes in board diversity. In Norway, France, Spain and Iceland, boards of public companies must be composed of at least 40% women.

The state of California was the first state to require companies to add women to their boards. California lawmakers signed Senate Bill 826, Women on Boards, into law in 2018. As of January 1, 2020, all publicly held domestic or foreign corporations whose principal executive offices are located in California must have at least one female board director on their boards. Corporations can either fill an open seat with a woman or add an additional seat. Depending on the size of the corporation, two women directors might be required.

Research Shows Mixed Results on the Connection Between Diversity and Performance

The Academy of Management conducted a meta-analysis of 140 research studies on female board representation and corporate performance in 2015. They found that accounting returns were positive, but there was no noticeable improvement in market performance.

Research by McKinsey & Co. showed that companies that appointed more women in senior executive and board roles have advantages over those that favor men in those positions.

You may be wondering why the results are so different? Research that's conducted by consulting firms and financial institutions is less accurate than peer-reviewed academic research.

Depending on which report you read, boards with women don't perform better, or at least they don't perform worse. A Harvard Business Review survey corroborates these findings with peer-reviewed results. They interviewed 19 board directors, of whom 15 were female and four were male. All directors held combined seats on 47 corporate boards, and they represented a variety of industries. The results showed that diversity doesn't guarantee better board or firm performance. The results of this particular survey suggested that the culture of the board was more of an indicator of the performance of diverse boards.

Redefining the Role of Diversity

When defining the meaning of diversity, such things as gender, age, race and ethnicity are some of the first things that come to mind. In digging a bit deeper, indications are that corporations do pretty well to establish diversity in those categories, but to maximize the effects of diversity, they must also consider social and professional diversity. In the switch toward increasing diversity, too many companies took a token approach.

In considering the conflicting results of the research, it's clear that diversity for the sake of diversity isn't enough. It's more important for boards to focus on the skills and ideas that directors bring into the boardroom, in addition to any type of diversity they offer to the board. The modern approach to diversity on boards is to attract socially diverse board directors and avoid filling board seats with like-minded people from the existing board directors' network.

Board self-evaluations note the gaps in skills that boards will have in their future. The recruitment effort should center around how to fill those gaps with candidates who also bring diversity of thought perspectives to the board.

The tables may be starting to turn in this direction, as many tech firms are producing more diversity within their C-suites. High-tech start-ups tend to appoint more women, minorities and younger board directors to leadership positions. Also, independent board directors typically bring a lot of diversity of thought into the boardroom. Nominating committees need to take more of an outside-the-normal-box approach to recruitment.

Board Culture Is an Indicator of Whether Diverse Perspectives Are Heard in Boardrooms

It's one thing for board directors to incorporate diversity into the boardroom ' it's another to involve them and to allow their perspectives to count and be heard. Some boards suffer from dynamics in which the senior leadership is too dominant and too quickly shuts down opposing viewpoints. The board chair can be instrumental in ensuring that diverse board directors will be heard and note the value that they bring to the board. Boards that develop trust in knowing that all discussions will be held inside the boardroom and that all perspectives will be given equal consideration create a more collegial environment in which it's easier to integrate ideas. It often helps to have a board director who is a champion for diversity and inclusion and who uses their influence to create a more egalitarian board.

Software Solutions Are the Modern Approach to Achieving Effective Board Diversity

As boards focus in on the types of diversity, including social and professional diversity, that they need to compose high-performing boards, digital tools are the key to obtaining valuable results on board self-evaluations and determining the board's future needs.

Diligent Corporation's Board Evaluation tool puts valuable board assessment data at your fingertips. The program lets you devise a variety of question types and view past evaluation results. Boards can automate completion status, set and change assessment close dates, and finalize questionnaires with a secure e-signature sign-off. To streamline the process even more, the program produces custom visual reports that are presentation-ready.

Drastically reduce your search time for board director diversity with Diligent Nominations. This tool opens up the profiles of over 125,000 potential board director candidates. Your committee can search using filters for experience, demographics, region, sector and discipline. It's the first tool that helps narrow board director candidates down by skills and diversity.

Diligent's Evaluations and Nominations tools are sure to become necessities as today's boards strive for the best possible board composition.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.